76th Con oBEssl av^jkrvx? /Dooumbnt
l8t Session / BU^INAiii. ^ No. 28
NATIONAL ECONOMY AND THE BANKING
SYSTEM OF THE UNITED STATES
AN EXPOSITION OF THE PRINCIPLES OF
MODERN MONETARY SCIENCE IN THEIR
REp^TION TO THE NATIONAL ECONOMY
AND THE BANKING SYSTEM OF THE
UNITED STATES
BY
ROBERT L. OWEN
Former Chairman^ Committee on Banking and
Currency f United States Senate
PRESENTED BY MR. LOGAN
January 24 (legislative day, Jan. 17), 1939.— Ordered
to be printed with illustrations
UNmSD STATES
GOVERNMENT PRINTINa OFFIOB
WASmNQTON t 1«S»
FOREWORD
Twenty-five years ago today Woodrow Wikon, in the presence of
members of his Cabinet, chief executive officers, and leaders of the
United States Senate and House of Representatives, approved the
Federal Reserve Act. Three solid gold penholders and pens had been
prepared for the occasion. Three origmal copies of this act were
printed in parchment and signed by Hon. Champ Clark, Speaker of
the House of Representatives; Hon. Thomas R. Marshall, President ot
the Senate; and the President of the United States.
One of these copies went to the Secretary of State, Hon. William.'
Jennings Bryan, for permanent record. One of the copies was pre-
sented to Hon. Carter Glass, chairman of the Committee on Banking:
and Currency of the House of Representatives, and one was presented'
to the chairman of the Committee on Banking and Currency of the
United States Senate. One of the gold pens was given to Hon.
William Gibbs McAdoo, Secretary of the Treasury; one to Hon. Carter
Glass ; and one to the chairman of the Senate committee.
This act was generally regarded as the greatest achievement of that
administration.
Under this act $40,000,000,000 of liquid money was created to
finance the World War. It financed not only the United States but
financed to the extent of billions of dollars Great Britain, France,
Italv, and their allies. **That one act won the war," said John
Skelton Williams, the Comptroller of the Currency.
The United States came out of this war in a highly prosperous
condition. This prospeiity was the result of the expansion of credit
and currency which enormously stimulated production and employ-
ment.
In 1921 those in control of the Federal Reserve System contracted
credit and currency by the use of the great powers of the Federal
Reserve Act. It resulted in depression.
Again in 1929-32 another depression followed the contraction of
the inoney supply. And a third depression took place in 1937 from
a similar cause.
The Federal Reserve System is supported by men of all parties.
Under no circumstances should it be considered in a partisan light.
Its operation vitally affects the economic and financial condition of
the entire country, including the Government itself.
There is lacking in the United States an informed public opinion
as to the cause and cure of depression.
With the hope of laying the foundation for a better understanding
of the principles of the Federal Reserve System and the use of its
powers to restore prosperity and prevent future depression, this
commentary is submitted for the considerate judgment of leaders of
public opimon in the United States.
Trustmg that this vital matter may not be clouded by any attempt
to fix the blame on anybody, or to attempt to gain partisan advantage,
I remain
Your faithful servant,
R. L. O.
December 23, 1938.
m
TABLE OF CONTENTS
Chapter I: »•••
Why money was invented.. — .. 1
• Why money originally had intrinsic value — 2
Why it is no longer necessary for money to have intrinsic value..... 3
Chapter II:
Money a creature of law . i
The creation of money a sovereign power of government 6
Chapter III:
The forms of money_- - _. -.- 6
The proper definition of money as employed in the United States 7
Chapter IV:
The function of money as a medium of exchange 9
The function of money as a measure of value.. 9
The difference between value and exchange value - 10
The function of money as a storage of value. _. • 10
Chapter V:
Currency as money _ 11
Modern check money, or bank credit 18
How this modern check money is created 14
The relative volume of currency and check money 16
Chapter VI:
The necessity for stable money _. 18
The evils of unstable money _ 19
The natural instability of our present-day check money 20
The money illusion _ 21
Chapter VII:
The orthodox traditional theory of money 22
The quantitative theory of money__ 23
Chapter VIII:
The dollar index and the price level _ 24
How prices are influenced 25
The alleged "disequilibrium" of wholesale prices 28
The volume of money and the price level 20
Chapter IX:
The relationshii) of the price level to factory employment and wages. 80
The price level in relation to car loadings , 88
The effect of the volume of money on the volume of construction
contracts 88
The effect on exports and imports of the contraction of credit and th©
money supply _ 84
The effect on our business enterprises of the contraction of credit and
the money supply 84
Chapter X:
The index of industrial production 85
The relationship of the index of industrial production to the price level. 80
Chapter XI:
The inadequacy of the present terms "the price level" and "the pur-
chasing power of money". - , 87
Chapter XII:
The methods by which money is expanded and contracted.. _ 88
The velocity of demand bank deposits _ 42
How demand bank deposits created by the Government flow into use 42
The money created by the people.. 48
Credit expansion through the sale of stocks 45
T
VI OONl!9iar£8
OhftpierXIH; pm#
Money in circulation wa an index of national income _ 47
The volume of money employed in- all economic activities. 40
The origin of buying power. _ 60
Chapter XIV:
The problem of unemployment 52
Money in relation to debt _ 67
The interest on debt. - _ _ _ 67
Labor and money. ,. 69
Abundance or scarcity 60
Monopoly and monpy _- 61
One hundred percent reserves. 62
Chapter XV:
The call rate on the security exchanges 63
The control of the security exchanges 64
Chapter XVI:
The inflation bogey _ _ 66
Chapter VXII:
The Constitution of the United States on money _.- 67
The powers of the Board of Governors of the Federal Reserve System 69
Chapter XVIII: '
The importance of a national monetary policy 70
Chapter XI A:
The necessity for Government management and stabilization of
money.. 73
Chapter XX:
The effects of stable money _ 76
On the banks - 76
On manufacturers - 77
On merchants __ _ 77
' On contractors _ - 77
On corporate and individual incomes _ 77
On agriculture __ 78
On wage earners - 78
On teachers -- 78
On Government income _ 78
On the creditor class _-_ - 79
On the submerged third _ 79
On the wealthy class _ - 79
Chapter XXI:
The capitalist system _ - 79
Chapter XXII:
Intemat \otxal stabilization impracticable. 80
The inadequacy of the former gold standard — _ 82
The modern use of gold and its possibilities - 88
Foreign exchange 84
Chapter XXIII:
Storm signals - 86
Public opinion and congressional control 87
Appendix.. - - 8g
Glossary -- - jy
Lincoln^s monetary policy 91
Monetary chart No. 1 - 92
Monetary chart No. 2 - 93
Table — Selected series on business activity 94
Some improvements that have been accomplished and some that are
neededin our monetary system - - 97
A few quotations of notable leaders _ 98
Noted members of the Stable Money Association - 106
Court decisions on money - - - - •• 108
Testimony of Robert L. Owen before committees of the House and
Senate 108
NATIONAL ECONOMY AND THE BANKING SYSTEM OF THl
UNITED STATES
Chaptbb I
WHY MONBT WAS INVBNTBD
Money was invented as a measure of value to enable people to
-exchange anything they had to seU for what they wanted, whether
services, commodities, or property.
In the earUest days of civilization men were compelled to rely
upon barter, to exchange a cow for so many sheep or goats, to exchange
a bow and arrow for a deerskin. Under sucb conditions there was
little or no incentive to manufacture the things people wanted in
quantity. There was also no incentive for merchandising. There
were no factories and no need for improved transportation to ship
^oods from one point to another.
Many centuries ago. gold and silver were employed as a medium
of exchange because tney were universally desired for their beauty,
resistance to corrosion and rust, compactness, and malleability.
They were particularly desired for ornaments. Therefore, they came
into use as a medium of exchange and as a measure of value.
Obviously, without money, a farmer who brought to town his
vegetables, fruits, eggs, chickens, milk, and butter could not, through
barter, go into a store and buy shoes and stockings, shirts, and other
clothing in exchange in barter for these, articles. It was necessary
for him first to convert the things he had into money and with the
money obtained to buy the things he wknted from the store. He
also needed money with which to pay the doctor and the dentist.
Thus, money was invented as a common denominator of products
and services for sale. Money became a measure of value and wa#
employed as a mediimi of exchange. Also, since money could be
employed at any time, it became a means of storing value which
could DC instantly used in buying anything desired. So that money
thus had three distinct purposes: As a measure of value, as a medium
of exchange, and as a means of saving or hoarding against the day
of need. . i .
Of course, money, when invented, was capable of minute subdi-
visions whether it was of silver or gold.
All modem money is. capable of minute subdivision. The mpney
of the United States for example, consisting of the dollar, is divisible
into one-tenth of a dollar, called a dime; one-hundredth of a dollfir^
called a cent; and one-thousandth of a dollar, called a mill. Thil
facilitates addition and subtraction and the keeping of accounts;
One of the impoitant reasons for the invention of money was to enable
men to keep an account of their indebtedness to each other witli
accuracy, so that repayment could be made with precision and
certainty.
2 NATIONAL BCONOMT AND THE BANKING SYSTfiM
The monetary unit in the United States was declared by law on the
5th of April 1792/ in a statute signed b^ President G^r^e Washington.
This dollar has been the monetary mut of account in heu of the other
forms of money from that day to this.
WHY MONEY OBIGINALLT HAD INTRINSIC VALUE
When money was first invented, principallj^ in the form of silver
and gold, it was necessary that the commodity silver or the commodity
gold employed as money should have, in itself, exchange value. It
was necessary that it should have^ intrinsic value because at that
time there was no government exercising sovereignty of a dependable
stability which could by law regulate the value of money or regulate
the quality and quantitv of the commodity to be employed as money.
As time processed the modem nations minted corn tokens of gold
and silver which had at first dependable intrinsic value but which
were subject to chknge by the authority of the government, so that
from time to time many governments were found, for their own con-
venience, changing the metallic intrinsic value of the gold and silver
coin by using alloys of metal of less value.
What proved to be more important was the instability of the issu-
ance of money by pvemment. For example, the French Govern-
ment at the beginmng of the World War had about 16 billion paper
francs redeemable on demand in gold which were circulated in France
as the equivalent of gold. Under the extrenie exigencies of the war,
the paper franc was expanded to about 80 billion francs and was no
longer convertible into gold as it had been previous to 1914. As a
consequence, this currency, which was deemed to be on a gold stand-
ard, diminished in its purchasing power to approximately one-fifth of
what it had been before, and at present is worth about 2.8 cents
instead of 19.3 cents (pre-war value) because of recent expansion and
because of a loss of gold with which to redeem it.
Because money having intrinsic value, such as gold, is preferred by
the people to paper money having no intrinsic value, when the two
moneys are both in circulation the gold money will be hoarded and
disappear whenever there comes any undue expansion of the paper
money. For this and other reasons all of the nations in the world have
now abandoned the use of gold as domestic currency.
The money of the United States depends for its value not on the
gold content of the dollar but strictly on the credit of the United
^ tates and the demand for such money, with which to pay taxes,
interest, the cost of living, etc.
WHY IT IS NO LONGEB NECESSARY FOR MONEY TO HAVE INTRINSIC
VALUE
The need for an intrinsic value of money which existed in former
years no longer exists in the United States. In previous times govern-
ments afforded no dependable security in the volume of money and
in the regulation of the value of inoney. Their paper nioney was
liable to expansion to a point where it decreased in purchasing power.
Therefore tne people preferred gold as money because its purchasing
power did not fall as paper money did. But unfortunately for the
NATIONAIi ECONOMY ANt^'mmmAmmQ STSTBM J
8tabUit;sr of money in those <liiy»,vwii<&^^^^ money began
to fall m value, gold mpne^r was held by the people and hoaraed ^d
thus retired from circulation^ iiiidei^ the W^ the so-called
Gresham law^ This law is no longer aplfUcable^ in the United States
because the Congress of the United States^^ having learned that^ld
as money in domestic circulation was a souirce of weakness, abolished
the use of gold in our domestic circulatiohV and conjBned its use to,
international exchange as a commodity, the price of which wai
arbitrarily fixed at $35 an ounce.
Now all paper money has, for the same reason, been made legal
tender. The value of this money is determined by the demand for it.
The demand is so great and the credit of our Government is so high
that legal tender currency has not only the purchasing power which
the gold dollar had in 1926, but it has a present purchasing power-
index of 130 (December 1938). In other words, it has a purchasing
power which 4as increased in terms of 784 listed commodities sold^ in
the wholesale markets by 30 percent as compared with 1926, which
had a normal predepression price level of 100.
The further reason why it is no longer necessary that our legal-
tender money have intrinsic value is the coUosal demand for money,
as compared to the supply of money. In 1926 the demand for check
money was demonstrated to be $846,000,000,000 as proven by the
amount of check money debited on the books of our banks.
In 1929, the volume of this check money rose to $1,230,000,000,000,
which at that time was 100 times the total monetary gold supply Of
the entire world and about 300 times the entire monetary gold supply
in the United States.
It is perfectly obvious that this turn-over of money through checks
could not possibly have been supplied by the use of gold. The modern
banking system has therefore created conditions which make the use
of gold as money entirely impracticable. The use of gold for currency
would prevent the huge busmess which is now being carried on by the
American people.
Another important reason why our money should not have intrinsic
value is that it would deprive Congress of the power to regulate the
value of money by regulating the volume of money. Congress^ could
not regulate the volume of gold used as a currency, gold being limited
in amount, by nature, and is subject to immediate hoarding and U^
shipment abroad if any question should arise to justify it. Congress
can regulate the volume of money in the form of legal tender currency
and also in the form of demand bank deposits (which will be described
later) upon which check money is based.
It thus follows that not only is there no longer any reason for our
legal-tender currency having intrinsic value, but there is a compelling
reason why our currency should not have intrinsic value.* It shoula
have only extrinsic value. It should only have an exchange value
as a token. Currency being a creature of Government, the value of
which must be regulated by the Government, the control of the
money supply must be kept within the control of the Government
itself.
4 K4TI0N AX* BOONO MY AKP THB BAIIKIKQ SYBTBM
•;^•.■ ■■•_ 'CBAFrSE'II ;
MOKST A CBEATITBIS OF tAW
^ TChe mon<dy of the United States is a creature of law. The Constitu-
tion of the United States gave to Congress the broad power exclusively
io create money. It withheld and denied to the States this power.
The, Supreme Court of the United States in the Legal Tender cases
(79 U. S. 644), gave this interpretation of the Constitution. It has
remained unchaUengeid and is not now denied by any informed person.
We quote a portion of the opinion in the Legal Tender cases:
CongJceaMi aa the legislature of a sovereign Nation, being expressly empowered
by the Constitution "to lay and collect taxes, to pay the debts and provide for the
<K>ini:nOn defence and^neral welfare of the united States," and "to borrow money
on the credit of the United States," and "to coin money and regulate the value
thereof ;and of foreign coin"; and beins clearly authorized, as incidental to the
ttiercise of those great powers, to emit bills of credit, to charter national banks,
i^id to provide a natioiial currency for the whole people, in the form of coin, treas-
ury notes, and national bank bills: and the power to make the notes of the Govern-
ment a legal tender In payment of private debts being one of the powers belonging
to sovereignty in other civilized nations, and not expressly withheld from Congress
by the Constitution; we are irresistibly impelled to the conclusion that the impress-
ing upon the treasury notes of the United States the quality of being a legal tender
in payment of private debts Is an appropriate means, conducive and plainly
adajpt^d to the execution of the undoubted powers of Congress, cons'stent with the
letter and spirit of the Constitution, and therefore, within the meaning of that
instrument, "necessary and proper for carrying into execution the powers vested
by this Constitution in the Government of the United States."
In addition to the broad power exclusively to create money for the
people of the United States, the Constitution^ in article I, section 8,
paragraph 6, gave Congress the explicit direction "to coin money and
to regulate the value thereof * * *.'*
When the State banks issued paper money, Congress imposed a tax
of 10 percent annually upon such paper money and suppressed it.
The Supreme Court held that the term *'to coin money" meant to
print money on paper as well as to impress the Government stamp on
metal
All of our paper currency is therefore directly authorized by the
Constitution, as interpreted by the Supreme Court. All such money
is necessarily "fiat" of government and is printed on the printing
press. It is necessarily "fiat" money, or "printing-press money,"
a]thoug:h these terms have been used derisively by those who preferred
p)ld coin as money, or who preferred paper money made redeemable
m gold coin.
No one understood the powers of the Government in relation to
money better than Abraham Lincoln. As a means of preserving the
Union, Lincoln issued legal-tender money in 1861 that was receivable
for all public and private debts. This money never fell below gold
parity.
On March 14^ 1900, the Gold Standard Act was passed by the
Congress, declarmg the dollar to be 26.8 grains, troy weight, of gold,
mne-tenths fine. This act placed $160,000,000 of gold coin in the'
United States Treasury to keep at parity all paper money issued, by
promising to redeem on demand this paper money in gold coin. The
act provided for the issuance of 3-percent gold bonds as a means of
iupplementing this supply of gold redemption money in case this
$160,000,000 should be depleted.
NATIONAL SqONOKY AND rmiB BAKKIKQ BITSTIDH $
Up to the domestic demoncitizaUoa of g^^ in 1934, this gold tviai
of $150,000;000 in gold coin bad not b^ depleted, for the slmpld
reason that the demand for dollars was so great that the people did not
care to redeem thrir pap« currency in goTd,
In 1 933 Congress authorized the rresioent to change the yaliie of gold
in terms of dollars. He did so, making gold worth $35 an ounce
instead of $20.67 an ounce, as imder the Gold Standard Act. Under
the act of January 1934, Congress demonetized gold in our domestic
circulation and has accumulated gold in the vaults of the Ooyern-
ment to the extent of $14,000,000,000. Gold is still flowing into the
United States from other parts of the world for the simple reason that
our legal-tender dollar has a greater purchasing power in the United
States than gold at $35 an ounce.
THE CREATION OF MONET A BOVEBEIGN FOWEB OF QOVERNMBNT
When the Constitution of the United States, gives the exclusive
right to Congress to coin money and regulate the value thereof , it
should be obvious that it gave the exercise of a sov^rei^ power
extending over the 48 States, Territories, and dependencies of thie
United States. By its very nature, the function of the creation of
money should be exercised by the^ Central Government alone, as a^ sov-
ereign power. It would be impossible, if this power were subdivided^
to regulate the value of money by regulating the volume of money.
It is of the greatest importance to note that the failure of the
Congress of the United States to exercise this sovereign power led to
the creation of monej by privately owned individual banks acting in
cooperation with their borrowers.
In 1863 President Lincoln was compelled to yield to the demand for
the establishment of the nationial-bank system, under which individual
banks were authorized to issue national bank notes based on the bonds
of the United States. This resulted in the issue of national bank
notes of various denominations by each individual bank. These
notes were not legal tender but were generally received because
Congress, in the exercise of its sovereign power, had authorized the
banks to issue such notes. The national bank notes, however, are in
S recess of retirement. They are being supplanted by the Federal
Reserve note and the silver certificate.
The Federal Reserve note is a note of the United States Govern-
ment which was issued, or loaned, to the individual 12 Federal Reserve
banks through the Federal Reserve agent at the headquarters of each
bank against the security of bonds, gold, and other sound bankable
assets. The issuance of these notes by the United States was an act
of sovereign power.
In 1933, as an act of sovereign power, they were all made legal
tender. This issue exceeds $4,600,000,000.
The silver certificate, consisting of $1 bills, sa^^s on its face that it is
redeemable in $1 in silver. This means a coined silver dollar, or
silver bullion at $1.29 per oimce. The present market price of silver
(Julv 1938) is about 42 cents an ounce instead of $1.29 an oimce.
Tne silver certificate, therefore, outside of its bullion value in silver
is based upon the sovereign power of the United States, the credit of
the Government, and the demand for the dollar bill. The demand for
Q NA^IONAli B<X)NOMy AND THE BANKING SYSTE3M
the dollar bill as a means of exchange is yer^ ^at. No one ever
thinks of redeeming a silver certificate dollar bill m bullion silver.^
The coinage of the silver dollar, half dollar, quarter, and dime is an
act of sovereignty; also the S^ent piece, the nickel; or the 1-cent
j^iece of copper.
So that all the currency of the United States, coined by the United
States, is created by an act of sovereignty, universally respected by
the American people.
A check of a demand -bank depositor on a solvent bank is payable
on demand in legal-tiender money. Thus the check is itself money.
The check transfers from one person to another in this way legal-
tender money, or the right to legal-tender money.
The right of the national banks to receive deposits, subject to
check, and the right of the national banks to make loans to private
citizens, or to buy the bonds of the United States, thus making loans
to the Government, is a grant by legislative power to the national
banjbi to create moiiey.
The State banks exercise the same privilege by implied consent.
It must be remembered that money is **any thing havmg a conven-
tional use employed as a medium of exchange and nieasure of value.''
A check represents a given number of monetary units employed as a
measure of value. When it is ^iven by the maker to the payee, it is
a medium of exchange transferring a fixed number of dollars from the
maker to the payee and is convertible on demand into legal- tender
eurrency. ~ . .
In this manner, the sovereign right to create money, which exclu-
sively belongs to the Congress, has been transferred to privately
owned corporations, not only in the national banking system, but
also to the privately owned corporations comprising the individual
banks established under the laws of the 48 different States.
Chapter III
THE FORMS OF MONEY
There have been very many forms of money employed in the
United States, including not only gold and silver, nickel and copper,
coined by the Government, but gold coined by private individuals
and companies, and tokens of other metals emploved by private
trading companies. In addition to these tokens, employed as money,
there have also been printed many other forms called scrip, printed
on paper, leather, metal, wood, etc.
In the Chase National Bank of New York there are 2,000 forms of
scrip money on display, a large part of which was made in the United
States dunng the hoarding of currency in the depression of 1929-32.
The Government of the United States in its bulletin on domestic
coin sets forth the total issue of all types of coin employed bv thei
people of the United States as money. A brief summary follows,
1938:
Gold - $4,226,218,477.60
Silver""! I. — "" - 1, 481, 204, 639. 80
Minor II 162,641,88a U
Besides these issues by the Government, there were many issues by
private persons and corporations (see the Standard Catalog of United
NATIONAL ECONOMY AND TBE BANKING SYSTEM f
States Coins and Currency, publisEed by the Scott Stamp & Coin Co,,
New Yorik^City).
In addition to these forms functioning as currency there was a greftt
variety of stamps employed as money m payment of letters aiid par-
cels transmitted by mail and in payment of inteimai revenue upon
various articles of merchaiidise. They are designated in monetary
units and fractions thereof.
The most familiar form of money, outside of the fractional coin
and currency, is the check of a depositor upon his demand-bank
deposit, which transfers from the maker to the payee a certain num-
ber, of dollars and fractional parts thereof. Over 95 piBrcent of our
national monetary business is transacted by the use of tlie check.
A check is a simple order on the bank to pay to the payee, or bearer^
a given number of dollars and its decimal parts thereof, and charge
it to the account of the maker of the check.
The advantage of the check, as money, is that it transfers from one
person to another a given number of "dollars, no matter how laige,
on a single sUp of paper. The transfer to the payee is jguaranteed
by the bank, which is responsible for identifyijQg the signature of
the maker and the signature of the payee when the check is cashed
by the bank, or paid by the bank through the transfer of the demand?
bank deposit from the maker to the payee.
In this way the transfer of money is greatly facilitated, cheapened,
and safeguarded. To pay a milhon dollars in gold and silver by
transmitting the bullion would be expensive, require insurance, and
take an unnecessary element of time. If money had to be transmitted
by mail or express it would necessarily involve insurance and risk.
A check which is lost can be immediately canceled and replaced.
Another great advantage of check money is that it enables the books
of businessmen to be kept with ease and accuracy and enables,
them, from their bank books, to make up their income taxes, accountSi
etc., with dependable certainty; whereas, if they paid their bills in
currency it would be necessary for them -to keep receipts for all such
transactions, and to take the currency in person and deUver it to the
merchants or payee at a considerable expense of time and trouble.
These difficulties are avoided by the check system which is safer,
cheaper, and more expeditious.
These are the fundamental reasons why this form of money has
grown in public favor in the United States and that check money
transactions have reached the collosal figures heretofore mentioned,
as $845,000,000,000 of check money paid through the banks in the
normal predepression year of 1926.
THE PROPER DEFINITION OF MONEY AS EMPLOYED IN THE UNITED STATES
Webster defines money as —
* * * anything having a conventional use as a medium of exchange and
measure of value.
The Century Dictionary and Encyclopedia defines it thus:
In a wider sense, any article of value which is generally accepted as a medium of
exchange; also, by extension, something which, though possessing little or no
intrinsic value, is recognized and accepted as a substitute for money as above
defined, such as paper money; any circulating medium of exchange.
NA*riONAL ECONOMY AND THE BANKING SYSTEM
IVoifettsor Walkctr defines it as;
Any medium, no matter of what it is made or why people want it, which no
one will refuse m exchange for his goods.
In recent years, since the passage of the Federal Reserve Act, check
money has been used as a medium of exchange and accepted without
discount bv the banks of the Reserve System and by the Reserve
banks so that checks in transit go into the hundreds of millions of
dollars at any given time. These checks function as money. They
represent money. They are safeguarded against counterfeiting by law.
They are safeguarded against fraud. They comprise the greatest
medium of exchange and measure of value in the united States, their
volume reaching the colossal figure in 1929. of $1,230,000,000,000.
They transact over 96 percent of the monetary business of the United
States; and even the currency which is employed by the people is
usually obtained by cashing a check in the bank and converting the
eh<Bck into legal tender money.
Demand bank deposits, convertible on demand into legal tender
currency thus constitute money, subject to immediate transfer from
one person to another.
The demand bank deposits, as of June 30, 1938, amounted to
approximately $26,000,000,000.
The total amount of currency in circulation outside of the United
States Treasury amounted to $6,461,000,000 as of June 30, 1938. Of
this currency, there was $712,000,000 held by the banks * of the
United States for the puri)08e of cashing checks on demand. The
banks also held as reserves in the Federal Reserve Banks, convertible
into currency on demand, $7,878,000,000, as of June 30, 1938. The
merchants and businessmen of the country held for change with their
customers probably $1,500,000,000, although this amount has not
been accurately ascertained. About $500,000,000 of currency has
been destroyed or lost in i>rocess of time, or has gone abroad. The
remainder of the currency in circulation outside of the Treasury is in
. the pockets of the people or hidden away, representing money which
individuals hold as savings deposits and hoard as savings deposits,
and a balance which is actively employed every day by the people
in their daily purchases of commodities and services. It has been
estimated that the currency received for wages and salaries has a
turn-over of approximately 20 times per annum, on an average. This
estimate of turn-over is merely a rough guess not capable of accurate
determination.
It is estimated that check money actively employed in transacting
the business of the coimtry has a turn-over of approximately 60 times
per annum for the reason that money so employed is used as economi-
cally as possible. In 1929 when the demand bank deposits were
$24,000,000,000 and the time deposits, quickly convertible into demand
bank deposits, were $10,000,000,000, the actual check money amounted
to 50 tunes the demand bank deposits, not counting any turn-over
whatever of the time deposits.
So we see that the money of the United States consists of currency,
'demand bank deposits, and checks drawn against demand bank
deposits*
The modem use of the word * 'money" is expressed very well by the
statement made by the Honorable Marriner S. Elccles, chairman of
t Mcmbtr banks F«d«rftl B«Mrye System.
NATIONAL EOONOMY AND THUI BAKKINQ SY8TBM jf
the Board of Governors of tJje Federal Beserve System l>eforej1lfee
Banking and Currency Committee of ^e House of Representative^;
In purchasing offerings of Government boiids; thei banking syiBtiiici 4a ft^^^^^^
creates new money, or bank deposits. When the banks buy a billion dollAinic^
Oovernment bonds as they are oflTered— and you have to coiisider the banking
system as a whole, as a uniWthe banks credit the deposit account of the treasury
with a billion dollars. They debit their Government bond account a billion
dollars, or they actually create, by a bookkeeping entry, a billion dollars.
Chapter IV
THE FUNCTION OP MONEY AS A MEDIUM OF EXCHANGE
The chief use of money is as a "medium of exchange.*' This
means a medium through which the exchange of property, com-^
modities^ or services of one citizen can be transferred for tne propcfftyi
commodities, or services of another citizen. In other words, a citizen
who receives payment in exchange for his labor, as wages or salary^
receives it in money. He then uses his money to buy the services ana
labor, or the products of the labor, of another citizen. A farmer
sells his products, such as com and wheat, for money and uses the
money as the medium of exchange with which to buy any of a thou-
sand articles for sale in, say, a department store. In this way the
money becomes a medium by which he exchanges his products for
the products of other people, collected from the ends of the earth in
a department store.
A citizen who receives his wages in money, u»es the money to buy
small services, such as the money due for the newspaper, for stainps,
for express charges. Thus money is a medium of exchange for the
labor of the citizen, for the services of government, and for the
services of corporations.
\ This use of money as a medium of exchange is of supreme importance
'and~lias increased in modem civilization to an extent not generally
understood. Money, as a medium of exchange, is required in order
to pay taxes, interest, Uving expenses; the expense of manufacturing
goods, the expense of transportmg commodities, the expense of selling
and advertismg commodities, and the expense of the professional
services of the doctor, dentist, and lawyer. Money is needed for the
sale of all the commodities in the wholesale markets. Money, as a
medium of exchange, is needed for the transfer of stocks and bonds,
real estate, equities, property, and services of all kinds.
This demand for money, as a medium of exchange, is what givcis
value to money as a creature of law, although the money itself ha^
no intrinsic value. As previously stated, the check mon<3y, debited
on the books of all the banks of the United States in the year 1926^
was $845,000,000,000, and in 1929 was $1,230,000,000,000, which
demonstrates the enormous use to which money as a medium of
exchange is employed.
THE FUNCTION OF MONEY AS A MEASURE OF VALUE
In order that money may be used as a **medium of exchange," it
must have the quality of being a "measure of value.'' Money in the
market place measures the value of commodities. Money in tne 8ecu<*
rity exchanges operates as a measure of value of stocks and bonds*
Money measures the value of real estate. Money is used as a measuM
10 NATIONAL ECONOMY AND THE BANKING SYSTEM
^ T«lue for public services^ such as carrying the mailSj express services^
I)lrofess]^^ semces^ and transpk>i:taU^ Money is used as a measure
^f Value in wurance policies, in savings accoimts, in evidence of debt,
such as bondjs and notes.
Money may be employed as a measure of value in formS^where such
mone^ does not function as a medium of exchange. Ordinarily it
f tiiictioiis both as a **medium of exchange'' and as a ^'measure of value.''
But moihey may be used as a measure of value without being actively
employed as a medium of exchange.
A savings account and a time deposit accurately measure the
value in monetary units of the debt due to the depositor, and even a
demand bank deposit may be a measure of value of the depositor's
ftccount in monetary unite without such demand deposit being em-
ployed as a medium of exchange. A demand deposit which is held
pjr the depositor unemployed, or inactive, is a measure of the value. of
hi8 deposit; but, if it is not emploved to pay othere, it is not a medium
of exchange except in a potential sense; tnat is, it may be converted
faito a medium of exchange by giving it circulation.
THE DIFFERENCE BETWEEN VALUE AND EXCHANGE VALUE
The air we breathe is of great value to life, but is has no exchange
value. It is not a subject for merchandising. A bushel of wheat has
value as food to the man who raises it, and eats it, but that trans-
action involves no exchange value. The food which Robinson Crusoe
jtouiid on the island had no exchange value, not even for barter.
The exchange value of a commodity depends upon the exchange
of the commodity for other commodities by barter or by selling for
money. The exchange value of wheat by barter depends upon the
supply of the wheat, the demand for the wheat, and the sujjply of the
commodity and demand for the conunodity with which it may be
exchanged, as so many bushels of wheat for so many sheep. The
exchai^e value of wheat in terms of dollars depends upon the supply
of wheat, the demand for wheat, and the supply of dollars and the
demand for dollars.
The exchange value of money for labor could not be better exem-
plified than ^ to recall that in the days of Christ 1 penny paid for a
day's labor in the vineyard. A day's labor in the vineyard now has
the same value as then, but not the same exchange value in pennies.
'The exchange value for a day's labor then was 1 penny. It is now
300 pennies or more. The reason i« perfectly plain ; pennies are now
300 times as numerous as they were then. A day's labor buys more-
pennies because the pennies are 300 times as numerous and the- penny
now buys only one three-hundredth part of what it bought then.
The purchasing power of the penny depended upon the number and
gupply of pennies.
THE FUNCTION OF MONEY AS A STORAGE OF VALUE
Money in terms of monetary units of account is also a storage of
value. A farmer sells his cattle for $2,000 and receives for the $2,000
a demand deposit. This is a storage of value in lieu of the cattle
which he had sold.
, He sells his demand bank deposit to the banker for a time deposit
on which he receives an annual interest. This money is a storage of
NATIONAL ECONOMY AN1> THB BANKING STStBM |J
value and all ixiyestment. He mft^ transfer his time deposit i^lb li
savings account, on which he receives interest at stated intervals*
This money also becomes a storage of value. Or he may invest his
demand bank deposit by buying the bonds of the United States or of
an industiial corporation. The bonds Would be an investment and a
storage of value m terms of money.
A man may convert his check mto legal**tender currency and hold
the currency as a storage of value for future use. It often happens
in periods of depression that citizens hoard currency as a storage of
value and take it out of circulation as a current memum of exchange.
Citizens convert stocks and bonds into demand deposits on a large
scale in a depression and hold these demand deposits as a storage of
value for future investment or use. Such demand deposits, thus
withdrawn from circulation, constitute a storage of value but do not
circulate as a medium of exchange.
In this manner the amount of money circulating as a medium of
exchange may be diminished by hoarding demand deposits and may
be increased by returning demand deposits to active use for the trans-
action of current business.
Chapteb V
CURRENCY AS MONEY
The currency of the United States in circulation outside of the
Treasury is used as a medium of exchange only when actively employed
by an individual as a medium of exchange. The currency of a country
wliich is held by the banks as a means of paying checks in legal-tender
money is not m active circulation until it actually passes into the
hands of the citizen, who transfers if from one hand to another. If the
citizen withdraws from the bank a thousand dollars in currency and
puts it in a locked box, it is withdrawn from circulation as a medium
of exchange.
In the first quarter of 1933 an extraordinary demand arose for
currency. It was satisfied by the issuance of about $2,000,000,000 of
Federal Reserve notes, which passed into the hands of the banks and
from the banks into the hands of the citizens who had called for it in
payment of their demand bank deposits. A very large part of this
currency was hoarded by the depositors who withdrew it from the
banks. When their fears were allayed, almost all of this money
returned to the Federal Reserve banks from which it came.
During the depression of 1929-32 the hoarding of currency by the
citizens of cash and deposits and the contraction of check money by
the bank was so great that nearly a thousand cities and communities
established barter exchanges and/or issued scrip money in large
volume. Detroit issued about $40,000,000; Flint, $118,000j Grand
Rapids, $840,000; Lansing, $40,000; Milwaukee, over $12,000,000;
Dayton, $760,000; Atlantic City, upward of $5,500,000; Paterson,
N. J., over $2,000,000; ICnoxville, more than $3,600,000; Birmingham,
over $1,000,000; and Atlanta, about $6,000,000. All this scrip money
was later retired.
Another substitute for currency has been the issuance of clearing-
house certificates. During the depression of 1929-32. over
$600,000,000 of clearing-house certificates were authorized, although
only partially used.
123338—39 2
12
NATIONAL ECONOMY AND THE BANKING SYSTEM
A greiit many citizens of small means do not keep bank accounts
!wit keep pidy a hoard of currency.
The currency held by stores and business houses as a means of
makihg Change for customers does not function as a circulating medium
of exchange but only as a means of changing larger bills into smaller
bills for the convenience of the customer. As there are about fifteen
hundred thousand stores and shops in the United States, the amount
of such monejr held for change out of circulation as a medium of
exchange goes into very large figures, probably exceeding the amount
held by the banks.
Of the total of the $6,000,000,000 of currency outside of the Treas-
ury in circulation, it is probable that not more than a half of it cir-
culates as a medium of exchange. People who need money as cur-
rency draw it from the banks on checks, pay it out for services and
commodities, and it passes into the hands of the merchants in exchange
for goods, and/ by the merchant is redeposited in the bank. In the
eveiit that ,tne ba^s need additional currency, they have over
#6,000,000,000 of reserves in the Federal Reserve banks which they
can convert into currency on demand, or they can negotiate loans
with the Reserve banks, against adequate security, and obtain from
the Federal Reserve banks, without cost. Federal Reserve notes as
currency.
The currency of the United States is printed in Washington at the
Bureau of Engraving and Printing under great safeguards. The
iractional coin of the United States is minted at the various mints of
the Government and distributed through the Reserve banks to
member banks, or directly to member banks, upon demand. The
paper currency is printed on the finest quality of paper with silk
thread running through and with the finest engravmg humanly
possible so as to prevent counterfeiting. When these notes become
soiled or mutilated, they are returned to the Treasury, destroyed
under proper safeguards, and replaced by fresh clean notes. The
following table shows the amount of present outstanding currency:
Tablb I. — Paper currency, by denominations, and coin in circulation
(Outside Treasury and Federal Reserve banks. In millloos of dollars]
End of mouth
Total
In circu-
lation I
Coin and small denomination currency *
Total Coin $1 »
$2
%6
*10
$20
1987:
July
August
September
October...
November.
December.
103S:
January...
February-
March
April
May
June
July
6,400
6,624
6,642
6,658
6,661
6,660
6,320
6,334
6,366
6,397
6,467
6,461
6,462
4,942
6,007
6,019
6,029
6,043
6,016
4,789
4,708
4,784
4,807
4,866
4,837
4.836
623
629
634
635
640
637
622
620
621
622
626
627
626
488
498
503
602
604
605
474
473
473
476
487
481
481
33
33
33
_33.
33
33
31
32
31
31
32
31
31
894
907
908
909
912
905
856
863
860
866
877
875
879
1,550
1,674
1,674
1,676
1,674
1,660
1,482
1,489
1,487
1,498
1,612
1,603
1,608
1,454
1,466
1,467
1,474
1,480
1,475
1,424
1,421
1,412
1,414
1,422
1,420
1,410
> Total of amounts of coin and paper currency shown by denominations less unassorted currency in
TnMRiry and Federal Reserve banks.
* Ineludea unassorted currency held in Treasury and Federal Reserve banks and currency of unknown
dcoomtnationa reported by the Treasury as destroyed.
• Paper currency only; $1 silver coins reptnted under coin.
NATIONAL ECONOMY AND TEB! BANKING SYSTSai 18
Tablk I.— Paper currency, by denomination, and coin in eireukUion — ^^Contlil^Aed
End of month
Large denominatioii eumncy *
D^Btf
Total
»oo
lioo
$800
«uooo
moQ
$10,000
Mrt«l>
1937:
July
1,620
1,520
1,627
1,631
1,626
1,642
1,632
1,638
1,673
1,693
1,616
1,627
1,618
381
382
382
384
381
387
382
382
385
388
389
391
'o88
697
698
702
704
701
710
705
708
718
725
727
732
727
137
187
138
138
136
139
138
138
144
146
162
162
162
288
283
285
286
287
288
288
291
300
304
307
309
807
- 7
7
7
6
5
6
7
7
9
12
17
17
17
18
,.}}
18
14
12
12
18
16
18
24
25
27
3
August..
4
September . ,
4
October .
6
November.—. ....
6
December ...
7
1938:
' January...
1
FebruMy.. J...
3
March ..^
8
April
8
Aiay r...
4
June
3
July
3
) Includes un&«8orted currency held in Treasury and Federal Reserye banks and eurrraoy of onknoiink
denominations reported by the Treasury as destroyed.
Back figures: Bee Annual Report for 1937 (table 36).
Source: Board of Governors of the Federal Reserve System.
MODERN CHECK MONEY, OR BANK CREDIT
Within the last half century there has taken place a great expansion
in the development of bank credit and bank check money. The
number of banks had greatly increased imtil 1921. Since then about
half the number have failed or closed their doors. The fluctuation in
the number of National and State banks for the years 1914 to 1935,
is as follows:
Tablb II. — National and State hanke
Year
Number of
national banks
(June 30 or
nearest date)
Number of
State banks
(June 30 or
nearest date)
Total numbor
of banks
(June 30 <w
nearest date)
1914.
1915.
1916.
1917.
1918.
1919.
1920.
1921.
1922.
1923.
1924
1925
192C
1927,
1928
1929
1930
IMI.
1932
1933
1934
1935
7,614
7,597
7,671
7,699
7,699
7,779
8,024
8,150
8,244
8,236
8,080
8,066
7,972
7,790
7,686
7,530
7,247
6,800
6,145
4,897
6,417
5,425
18,760
19,008
19,470
19,896
20,635
20,821
21,805
22,410
21, 914
21,697
20.916
20,413
19,882
18,975
18,256
17,580
16,605
16,103
12,601
9,622
10,418
10,560
79,i
80,800
30,158
29,833
28,908
28,47«
27,864
26.78$
26.941
26,110
23,853
21, $08
19,046
14,518
15,835
15,904
Bouroer Board of Qovernon of tbe Federal Reeerye Bystem.
;14 IIATIONAL ECONOMY AND T&Bi BANKING SYSTEM
Th* the Uniiod States to create the
itiotiej^reiqiiited by the people for the tra^^^ greatly ex-
pan&ng voiinne of business naturially caused the people to resort to
Ihe manufacture of money through the banl^s by loanfi.
The system of handling money through checks was so cheap and
convenient that the people expanded this systom to meet require-
ments. The people were compelled, of course, to pay for such ac-
conimodation, or creation of credit^ by the banks.
Six-percent interest was estabhshed in most Statos as a legal
rato of interest for loans. Sometimes, particularly in the Western
States, the rates went higher. Sometimes, as in contracts, higher
rates than the legal rate were allowed under special sections of the
statute. . -
Thus, the credit money built up by this checking system was based
on debt, subject to interest and compound interest. This made the
i^stem hazardous because of the fears of the changing value of the
security upon which the loans of money were based when borrowers
were compelled to liquidate by forced sales, whether voluntary or
involuntary.
When the banks call their loans they destroy the money supply by
canceling the demand deposits. They thus increase the purchasing
power of money in terms of stocks, property, and conamodities.
\RiU8 the banks impair and diminish the value of their own securities
and impair the solvency of their own borrowers, thereby bringing
nun upon themselves and upon the industry and conmierce of the
country.
Every bank seeks its own safety. There is no cooperation or control
of the money supply through the banks. Their policy of fear, and
the consequences of fear, can only be neutralized by the powers of
the Government, which has no fear and can expand the money supply
when the banks, because of fear, contract it to their own ruin.
HOW THIS MODEEN CHECK MONEY IS CREATED
In the eighteenth century when the Bank of Amsterdam was
founded it took deposits in the form of gold and gave receipts against
the gold on deposit. Its operators found that the receipts served a
better purpose than the gold itself. Under their system the gold was
iii a vault thorouj^hly protected against robbery and the receipts
were personal receipts transferable. These receipts functioned as
money. So lone; as the bank followed the system of issuing receipts
only against gold on deposit, its receipts circulated as freely as gold
itseii .
I^ the be^nning the operators of the bank never thought of issuing
receipts against gold which they did not have, but as years went by
and the depositors very rarely called for the gold and were content to
circulate the receipts in place of the gold, the bank arrived at the con-
clusion that they would be safe issuing other receipts not covered by
gold but covered by mortgages and property which they thought
might be convertible, if necessary, into gold.
When at last it was discovered that the outstanding receipts of the
bank very greatly exceeded the amount of gold the bank held, it re-
sulted in the destruction of the bank by a flood of demands for gold
that the bank could not supply.
NATIONAL ECONOMT ANB T^ BANKXNQ BTSTSHi |S
In the Umted States the ba&kd were permitted; on an ayera|^
prior to the Bank Act of 1935^ to make loans to an extent of 10 tim«9
as great as the currency which they had available in vault or as reserves
held for them by other banks. As a consequence the banks made
loans against mortgages on cattle and horses, houses, the hypotheca*
tion of stocks, goods, and on other assets deemed to be sound bankable
assets. But usually the bank took security in excess of the amount
of the loan.
A citizen needing money for feeding a carload of cattle would give
his note to the bank, secured by cattle in excess of the value of the
note, and in excess of the corn necessary to feed the cattle. When the
cattle were sold, the note would be paid with its interest and the
borrower would retain the balance of the proceeds as his profit,
A borrower mi^ht put up as security certificates of stock in some
•corporation of which the banker knew.
Whatever the security, the prime object of the banker was to
make a loan that was safe, that would pay him the legal rate of
interest, and that would be paid at a fixed period of time.
Mr. John Smith wanted a thousand dollars against security. Mr,-
Smith would ^ve his note for 90 days, bearing 6-percent interest,
with the security attached. And the banker would thereupon enter
on the books of the bank a credit to John Smith, precisely as if John
Smith had paid into the bank that amount in gold dollars, or in legal-
tender notes.
The banker and John Smith combined in this way to create a
demand bank deposit subject to check.
When John Smith made this contract with the bank, the bank
agreed to pay his checks on demand in legal tender to the extent of
the loan. Here was the manufacture of money in the form of a
demand bank deposit by John Smith and the bank. Thus pubho
and private assets were monetized by the bank.
Not only was money thus created by the bank and its depositors,
but the money supply of the country was contracted when the loan
was paid off.
When John Smith sold his cattle for somebody else's money, hei
received a check from the buyer of. the cattle on a bank. He de-
livered the check to his banker and was given credit for it. He then
paid the loans he had made, with interest, out of the demand deposit
created by the check received for the cattle he had sold. Thus John
Smith canceled the amount of money he had previously received and
also transferred to the banker the interest on his loan. This interest
was taken out of the demand deposit and transferred to the bank as
a profit. Such money, as profit, withdrawn from the demand bank
deposits, was a further cancelation of demand deposits, and a trans-
fer of such demand deposits to the banker as an investment, and
became a part of his undivided profits or capital.
It matters not how many times you multiply this transacitioh.
The principles involved are the same. The bank and the borrower
create money in the form of demand bank deposits subject to check.
They destroy the demand deposits thus created when the loan 13
paid. The banks, therefore, through this process expand money and
contract money.
When a bank buys $1,000 of Govemment'bonds/it creates $1,000.
of demand deposits to pay for the bonds, which the Qoverhment putii.
16
NA*nONAL BCONOMY Al«> THE BANKING SYSTEM
into circulation by spending. This is an increase of the money
When the banks sell the $1,000 of bonds to their own depositors^
$1,000 of demand deposits is transferred from the depositors to the
banks ais a cash asset which the banks can then lend to their customers
at 6 percent without expanding their deposits any further.
This means that the banks can buy a 3 percent Government bond,
sell the b6nd to demand bank depositors and loan the money re-
ceived at 6 percent to other customers. This asset then reappears
Under the head of loans. It first appeared as an investment in bonds.
Then it retired a Hke amount of demand deposits by adding such
deposits to the assets of the banks in so-called cash on hand. That
cash, when loaned, reappeared under the head of loans. Thus the
net effect is to transfer. a loan to the Government into a loan to
citizens at a higher rate of interest.
It is in this manner that credit is rendered more unstable, because
when the banks become frightened, they call the loans of the citizen,
whereas, if they had kept the Government bonds, they would not
recall the loan to the Government.
When the Government sells baby bonds on a large scale to the
people it has the effect of drying up the circulating medium, in the
form of demand bank^ deposits, by converting such small individual
demand deposits into individual investments m a nonUquid security.
It becomes a savings account in lieu of liquid money available as a
medium of exchange.
It is of imj)ortance for students to notice the manner in which this
is done. It illustrates the manner in which money created can be
immediately retired or canceled.
THE RELATIVE VOLUME OP CURRENCY AND CHECK MONEY
It is of importance to observe the relative volume of currency,
outside of the Treasury in circulation, and the volume of check money
in circulation.
The total amount of currency outside of the Treasury for each year
from the years 1926 to 1936 is as follows;
Total currency in circulation
1926.
1927.
1928.
1929.
1930.
1931.
Cut'
. 46
- 46
. 4 5
. 4 5
. 4 2
_ 4 6
1932.
1933.
1934.
1935.
1936.
Our-
rencpt
- 5.4
. 5.4
- 5.4
. 5.6
. 6.2
1 Indicat«t billions snd decimals thereof.
Soturce: Board ot OoT«mon of the Federal Reserve System.
The volume of currency, as heretofore pointed out, in actual circu-
lation by the people as pocket money, probably does not exceed
one-half of the total amount outside of the Treasury.
So that $3,000,000,000 is probably a maximum estimate at present
of the currency in actual circulation as pocket money, including
that which is hoarded. This money is largely received for wages
and salaries, being paid daily, weeldy, and monthly. It has been
NATIONAL ECONOMY AND IBBi BANKING STSTBU
w
estimated that there is an average tuni^ver of about 26 ti^(ior;iN^
annum for currency. It is estimated, on the other hand; that iUp
tum-over of check money is normally much more rapid. The total
volume of such check money for the years 1926 to date, and the total
demand deposits as of June 30 for each of these years, will indicate
the relative speed of the tum*over on the average:
Average
turnover of demand deposit
8
Year
Volume of
demand
deposits •
Volume of
check
money »
Average
turn-
over
Year
Volume of
demand
deposits >
Volume of
check
money »
Avvngn
turn-
over
1926
21.6
22.2
22.3
22.6
21.8
19.9
16.6
84S
920
1,074
1,230
900
660
460
39
41
48
54
41
33
. 28
1933
14.4
16.6
20.6
23.8
25.2
24.3
480
470
630
611
637
3ft
1927.
1934-
39
1928
1936...^-
1936
25
1929
2»
1930
1937 ,
36
1931
1938-
2>
1932
1 Indicates billions and decimals thereof.
• Preliminary.
Source: Board of Oovemors of the Federal Reserve System.
It must be remembered, however, that in periods of depression a
large part of the demand bank deposits are hoarded for future invest-
ment. Therefore, the turn-over of the entire demand deposits at
such a time is a theoretical fiction. It is probable that at the present
time, when the check turn-over is estimated at a total annual volume
of $530,000,000,000 that less than $11, 000,000,000 is so employed, and
that this $11,000,000,000 has an actual turnover of 50 times per annum.
The total volume of money employed as a medium of exchangib
consists of credit and currency. It was for this reason that those
who wished to increase the purchasing power of monev and diminish
the price of the products and services of labor, conaucted an open
campaign in 1920 by declaring their purpose to make a "persistent
attack on the high cost of living by the courageous and intelligent
deflation of overexpanded credit and currency." Their conception
was that if the dollar could buy more it would be better for the people
who had dollars to spend. They were convinced that by the contrac-
tion of credit and currency the dollar would increase m purchasing
power.
This economic theory was completely demonstrated by what took
place. The Federal Reserve banks and the member banks con-
tracted credit and currency on a large scale, with the result that the
price level, representing the volume of money employed in the pur-
chase of commodities in the wholesale markets, fell from an index iii
May 1920 of 167 to 93 by June 1921. The index of the purchasing
power of the dollar, which is always in inverse ratio to the price level^
or all-commodity index, steadily rose from 60 in May 1920, to 107 ill
June 1921. Naturally, as the volume of credit and currency contracta^
the purchasing power of the dollar would rise because of the scarcity
created in dollars. It was merely a |)roof of the well-established
axiom that the exchange value of anything depends upon the law of
supply and demand.
The volume of currency in circulation outside of the Treaauiy is-
naturally, as a matter of statistics, comparatively uniform, Only
IS
NATIONAL ECONOMY AND THE BANKING SYSTEM
inereasmg to the extent of aa increasing demand by a growing popula-
tion. Occasionally thei*6 arises an extraordinary ; demand for cur-
rency, such as m the first quarter of 1933. With the failure of many
banks/ there was a sudden expansion of Federal Reserve notes due
to the demand for currency by frightened bank depositors. At this
time the cxirrency suddenly increased about $2,000,000,000. It
afterward returned, in large part, to the Federal Reserve banks when
the fear of depositors had ceased, because of the insurance of bank
deposits.
In 1932, as heretofore stated, the people protected themselves
against the hoarding of currency by manufacturing scrip money,
which was not authorized by law, but which served as a substitute
for currency.
Check money, or bank credit in the form of demand bank deposits,
goes through great fluctuations, depending upon the condition of
credit in the banks. An illustration of these violent changes is best
clranonstrated by tlie estimate of the volume of check money employed
from 1926 to 1938.
In comparison with the amount of currency in circulation outside
of the Treasury, the following table presents th^ volume of check
money employed from 1926 to 1938.
Relative volume of currency and check money
Year
Checks >
Curreocy'
Year
Checks »
Currency'
1030
845
920
1,074
1,230
900
660
450
4.6
4.6
4.6
4.5
4.2
4.5
5 4
1933
430
470
630
611
637
530
6.4
1927
1934
5.4
1V28
1935
5.6
1929
1938
6.2
1980
1937
6.5
1931
1938
6.8
1932
' Indicated billions and decimals thereof.
Source: Board of Governors of the Federal Reserve System.
A portion of this currencjr in the pockets of the people also has a
turn-over amounting to possibly 26 times per annum. ^
Chapter VI
THE NECESSITY FOR STABLE MONEY
The necessity for stable money has long been recognized as of
supreme importance in giving stability to the value of labor and
property and establishing justice between debtor and creditor.
Since money is a measure of value, obviously, to change this meas-
ure (the purchasing power of the dollar) would mean that there
would be no stability in the measure of the value due to a creditor
by a debtor. The creditor is entitled to be repaid in a dollar of the
«ame purchasing power that he loaned and no more. And the
<lebtor should not be required to pay his debt in a dollar of greater
purchasing power than the dollar he borrowed.
When tne Government issued its bonds for the prosecution of the
World War and the purchasing power of the dollar fell to an index
of 60 in May 1920, such bonds ought not injustice to be required to
be liquidated in dollars whose purchasing power is an index of 130,
NATIONAL ECONOMY AND THE BANKING SYSTEM
w
fiksia December 1938. This truth is thorou^ily well under^tcN)^ b^
all informed economists, but the diflBiculty in aocompliBhing the
objective of a money which shall have a uniform, debt-payii^, pui^
chasing power from one generation to another has been a lack of
informed public opinion.
There has been a failure on the part of the orthodox economist,
who relies upon tradition, to realize the part played in the measuring^
power of money by the modern substitute for currency, check money.
The Stable Money Asjsociation has been under the leadership of some
of the greatest leaders in finance and industry. For example, Owen
D. Youn^, chairman, General Electric Co. ; M. C, Rorty, vice-president,
International Telephone & Telegraph Co. ; Heniy A. Wallace, Secretary
of Agriculture; Bernard M. Baruch, financier; /ohn J. Raskob, former
chairman, Democratic National Committee; Alfred P. Sloan, Jn,
president, General Motors; John W. Davis, former Democratic candi-
date for President; Elihu Root, former Secretary of State and of War;
Nicholas Murray Butler, president, Columbia University; Otto H.
Kahn, president, Kuhn, Loeb, & Co.; Matthew WoU, president,
Union Labor Life Insurance Co.; Irving Fisher, professor emeritus of
economics, Yale; Charles Evans Hughes, Chief Justice, United States
Supreme Court; John L. Lewis, president. United Mine Workers of
America; I-.ouis J. Taber, national master. National Grange; Gumey
E. Newlm, president, American Bar Association.
A more complete list of these men will be found in the appendix.
THE EVILS OF UNSTABLE MONEY
When a farmer borrows 100 bushels of wheat, he can repay it with
100 bushels of wheat. But if he borrows $100, he might easily find
himself compelled to sell twice as many bushels of wheat with which
to obtain the $100 for the repayment of the debt.
There have been 27 distinct periods in the history of the United
States during which a serious change took place in the purchasing-
power of money, always due to the increase or decrease of the volume
of money. The most violent example perhaps in recent years was^
what took place in 1921 and in 1929-32.
The following table shows some of the effects on a selected group
of the more prominent farm commodities of the expansion and con-
traction of the purchasing power of money.
Index numhera of whokaale prices for cotton, corn, wheat, and composite group of nil
farm products for selected periods
Date
May 1920 ,
September 1920
January 1921 ^
May 1921
July 1921.
July 1929 ,
December 1929
July 1930
Averafce for year 1936
Low of 1932
' June. » D6oember
Source: Bureau of Labor Statistics.
Cotton,
Corn, con-
Wheat, No.
2 Rod Win.
Middling,
tract
per
grades, per
bushel,
ter, per
pound,
bushel.
New York
Chicago
Chicago
235.8
262.9
192.8
171.6
173.3
161.6
95.3
89.9
127.2
73.8
81.2
101.7
70.5
80.9
79.7
106.0
131.1
86.6
98.6
118.6
84.3
75.1
107.2
57.7
69.1
111. 2
71.1
180.1
• 80.6
•20.9
Group of
all farm .
produce
169.8.
143. »•
ioi;«-
83.1
86. 6^
107.6.
101. »
88.1
8a»
<44.1
1 Noyember snd December.
20 NATIONAL ECONOMY AND THE BAKKINQ SYSTEM
Undor thoTO conditions the fanners of the country have universally
suffer)^ and nnliions of theni Im
The fl^ctuation in the purchasing i)Ower of money, however, has
been much greater in the security exchanges, where prices are not
only affectedby the abundance and scarcity of money, but also by the
scarcity and abundance of stocks for sale. In 1929 the common and
preferred stocks listed on the New York Stock exchange reached a
high market price of $89,000,000,000. By June 1932, they had fallen
to a low of $12,000,000,000. This demonstrates that the purchasing
power of the dollar in the stock market increased over 600 percent
Deoause of the scarcity of money, or bank credit, and the super-
abundance of stocks for sale at the bottom of a depression.
The same thin^ is manifest in the real estate market, particularly
on real estate which has no income-producing value but which is held
merely for investment. Here the change is often very great. The
dollar will sometimes buy vacant real estate in the towns for the taxes
and will buy imfeultivated lands for one-fifth to one-tenth of its
previous market price.
So, we see that the evils of a fluctuation in the way of an expansion
or a contraction manifest themselves in all of the products of human
labor and other forms of property. But the evil is far worse when
money rises in value because of scarcity, because it then results, as at
present, in 10 or 12 million people being thrown out of work and
unable to sell their labor at any price, and who are compelled to rely
upon their sayings, or upon public relief and private charity and who
suffer from being underfed, underdo thed, and undersheltered.
Such periods of severe change in the value of money result not only
in the unemployment of millions of people, but it has the effect of
lowering the health and morale of the people by millions and causing
them to resort to criminal acts as a means of affording themselves
temporary rehef .
Tne consequences, broadly, of the change in the purchasing power
of money ,win be more clearly seen from the monetary table for the
years 1943 to 1936. (See appendix.)
For a much more detailecl description of the harm that money does
to the economy of a country, read The Money Illusion by Irving Fisher
professor emeritus of economics at Yale University.
THE NATURAL INSTABILITY OF OUR PRESENT-DAY CHECK MONEY
Our present check money is by its own nature unstable, as money,
because the volume is not under any control.
Our modern check money is created by debt. When a man borrows
$1,000 from the bank, he creates a debt with the bank.
In this manner a thousand dollars of money in the form of a demand
bank deposit is created, as has been explained. Until this debt is
paid this deposit circulates as money, being transferred from one
depositor to another depositor. It is immaterial if a person receiving
a check on this deposit puts the check with another bank. That
would merely be transferring the money from one bank to another
bank. The money, as a demand bank deposit, continues to circulate
until the debt is paid.
On June 30, 1929, the banks had $41,600,000,000 of such loans
outstanding.
NAl?IONAL BSOOKOirr AND Tra BAMXINO StVTMf ^
III additioa to imyate loans thtm made by^^t^^ banks^ tbc^ ^W
•create money when they buy the bonds of the United States Qovem*
ment, or of any State, county, city, or corporation in tint United
States. _.:,.,,. ■ , ., . !
When the banks contracted their loans of $41,000,000,000 by
Jime 30, 1932, to some $20,000,000,000, they contracted the money
supply correspondingly; so that the demana bank deposits and the
time deposits of the banks fell in 3 years, from June 30, 1929, to ^une
30, 1932, by approxiaiately the same amount. Demand bank depoaitB
therefore fell from $24^000,000,000 to about $14,000,000,000, and
the time deposits were duninished by about $10,000,000,000, the time
deposits bemg transferred to the banker as demand deposits, and
then the demand deposits were employed to pay the debts to the
banks. In this manner, many thousands of banks, moved by fear.
caused a shrinkage in demand bank deposits and time deposits or
$20,000,000,000. This caused the shrinkage of the volume of check
money from $1,230,000,000,000 in 1929 to $460,000,000,000 in 1932,
and caused, at the same time, the increased purchasing power of
money and the decreased exchange value of property, causing uni-
versal bankruptcy.
It should be clear, therefore, that when the money supply is based
upon loans made by privately owned banks and is subject to undue
expansion through overoptunism, or to undue contraction through
pessimism, such money is, by its nature, unstable and dangerous to
the welfare of all of the people — not only the poor, but also often ruinous
to the rich.
Money being also created by the Government through the sale of its
bonds, and by States ' counties, cities, and corporations, the volume
of money is affected by such debts and is made by natiu-e unstable.
This unstability will last until the powers of the Government are used
to render money stable by exercising the constitutional power and
<iuty of the United States exclusively to create the money which the
people need as a medium of exchange and to regulate the volume and
value.
It is known that under comparatively stable money, the nation^
production increases at the rate of 4 percent per annum, and except
for these depressions we should now have a normal production of Over
50 percent more than it was in 1926. But the decrease which actually
took place during the last ^anic of 1929-32 amounts to a net loss of
$164,000,000,000 in the national income without counting the loss of
the 4-percent increase we should have had.
THE MONEY ILLUSION
People have a general illusion that money is stable and that prop-
erty is unstable because it rises and falls in price; whereas, it is money
which falls and rises in purchasing power because of scarcity or
abundance. They do not realize that when all commodities and all
forms of property fall in value, it is not because the intrinsic value of
these properties and commodities change, but because the money,
with which they are all measured, changes in voliime and becomes
scarcer or more abundant.
When the commodities in the wholesale markets in 1933 required
40 percent less money to be bought than ia 1929, it was because the
jg mMmcmi^ msmoittAm^Tsm banking sysi'bm
tB©ii0yfitti>p!y irad contra everything,
the fitearcity of inone^ value of evervthing to fall. When
the liibiiey supply is more abundant, or doubles, and the volume of
commodities is uinchanged, the exchange value in money of all com-
moditibs and properties doubles.
While this truth is recognized by all informed students, neverthe-
less the illusion persists with a great body of the people that it is not
the money that changes in value but the property.
Only an informed public opinion can change this erroneous think-
ing. It takes time to overcome such a world-wide error. It took
many decades for the people of the world to learn that the sun did
not revolve around the world, but that the world turned on its own
axis and revolved around the sun.
Chapter VII
THE ORTHODOX TRADITIONAL THEORY OP MONEY
Prior to the twentieth century it was the traditional theory of
money, held by orthodox professors of political economy, that gold
was money provided by Nature and that nothing else was money.
This opinion was expressed very clearly by the ^reat financier, J. P.
Morgan, in December 1912, in answering a question of Samuel Unter-
myer during the Pujo investigation. Mr. Morgan said, '^Gold is
money and nothing else is."
It was believed that gold, because of its stable volume, was a more
stable measure of value than anything known to the human race.
There was always a demand for it because of its beauty, malleability,
ductility, resistance to corrosion, handy size in relation to value, etc.
It was, therefore, a convenient measure of value. It was authorized
to be stamped by the Congress of the United States in 1792 as United
States money, and it continued to serve as legal tender by weight until
1934.
It was purchased by the Treasury at a fixed value by weight when
minted. On March 14, 1900, the Gold Standard Act was passed,
declaring the dollar to be 25.8 troy grains, nine-tenths fine.
Gold was used domestically by nearlv all the leading nations of the
world prior to the World War and is still used as a basis of international
exchange.
It was the orthodox theory, therefore, that gold had been made by
law the standard measure of value and that currency, which was
redeemable in gold, and silver certificates convertible into gold, and
fractional coins made legal tender by statute in limited amounts,
comprised money in the United States and no substitute for money,
such as a check, could properly be called money. Upon this premise,
that money consisted of legalized currency and nothing else, the
orthodox traditional economists pointed out with justice that such
money (statutory currency) did not fluctuate in such an amount as
to account for the violent changes which took place in the market
price of commodities and of stocks on the security exchanges.
In 1933 the Congress passed an act making all currency legal tender,
later retiring the national bank notes as money and demonetizing
gold in domestic circulation.
Upon the premise that gold and legalized currency alone consti-
tuted money, the orthodox economist denied the quantitative theory
NATIONAL S»:X>NOMr AXO(t£HKBAI^^
which holds that the purehasmg power of money is deterttiiix^d V|^
its volume. They held that the overproduction o( goods catisiiditlii
violent fluctuations in the iiiiarket price of <M)iiimO(htie8, 1^«^ held
that gambling on the stock markets accounted for the change m ilie
prices of securities. THey held that the lack of pubMc ooMdenoe
caused the changes in miarket prices.
There are manv other theories, more or le^ fanciful/ lU'ged by other
economists which have been quite adequately answered by I^f.
Irving Fisher in his book Booms and Depressions. It is sufficient for
this exposition to state that the orthodox theory denies the quantita-
tive theory of money on the premise that nothing is money except
gold, or currency redeemable in gold.
Economists holding this view have therefore insisted on a return
to the gold standard of 1900^ and have denounced the demonetization
of gold in domestic circulation, and the act of Congress making un-
lawful contracts payable in dollars of a standard weight of gold, and
providing that all such contracts can be liquidated in lawful money.
Students should remember that inoney is anything which by con-
ventional use is employed as a medium of exchange and measure of
value, and that a recognition of this truth completely solves the
question of what makes the value of money. A knowledge of the
meaning of money therefore enables the student to demonstrate
that money is subject to the everlasting law of supply and demand
and that its value always depends upon the supply of money in
relation to the demand for money.
THE QUANTITATIVE THEORY OF MONEY
The quantitative theory of money is simply that the value of money
depends upon the supply of, and demand for, money.
The colossal demand for money is well known. It takes $12,000,-
000,000 per annum to pay the interest charges on borrowed money.
It takes $14,000,000,000 of money to pay the taxes of the United
States, the States, and their subdivisions. It took $846,000,000,000 of
check money to meet the requirements Of the American people in 1926,
and if their growth had been normal from that time to this, it would
have required approxiinately an increase of probably 4 percent per
annum. This increase is estimated variously as from 3 to 6 percent
in America, yet in Great Britain, under managed money. Sir K^inald
McKenna reported in February 1938 that the increase of the mdus-
trial production of Great Bri tarn had been 60 percent in 6 years.
The supply of money in the United States, based upon debt, has
suffered violent fluctuations, as heretofore set forth. At the present
time, December 1938, the volume of check money is estimated to be
at the rate of $530^00,000,000 per annum. This is far less than hall
of what it was in 1929.
Modem students of monetary science now know with certainty that
the value of money depends upon the supply of money in relation to
the demand for money. Gustav Cassel, professor of political economy
at the University of Stockholm, in his lectures on Post War Monetary
Stabilization before the University of Columbia and the University ol
Chicago, sets forth these correct principles. His lectures are pub-
lished in book form by the Columbia University Press.
24 nAmonAL Movout Aim ths bankikg srcrrau
^FlM Tiklaw ol ft dutteaoy to MsentlftUy^ determined by tbe searoity in the suppTy
; It io^k nwny y^i^ of biird work' t« get people to understand that the only
tibliDg tliat has r^l importance for the value of a currency is the total supply of
the ineto^ of pajrtnent (p. 3).
The gold standard is nothing else than a paper standard^ the value of which
is entirely dependent upon the way in which the supply of the means of payment
iariMulated Cp. 4).
The purchasing power of money is exclusively dependent on the scarcity in the
supply of the means of payment (p. 42).
The value of money cannot possibly be dependent on anything but the supply
oi money in relation to the demand for money (pp. 01-92).
Cassel uses the term "means of payment" to include currency and
checks.
To illustrate these truths^ Professor Cassel quotes the experience
of the leading European nations. France^ for example, increased the
voltmle of the French franc five times, with the result that the pur-
chasing power of the franc fell to one-fifth of what it had been.
Italy expanded ^the hra four times, with the result that the lira
fell in purchasing power to one-fourth of what it had been.
Our own experience in the United States has completely demonstra-
ted the truth of the quantitative theory.
The supply of money, as a medium of exchange, consists only of the
Yolume of money so emplojred, and does not consist of currency
hoarded, or currency in the tills of banks and business houses; or of
demand deposits which are hoarded and held inactive and dormant
as reserves, or for future investment. This must be remembered in
applying the quantitative theory.
Chapter VIII
THE DOLLAR INDEX AND THE PRICE LEVEL
For 40 years the Department of Labor has been endeavoring to
establish the dollar index to show the relative purchasing power of
the dollar in the primary wholesale markets. To accomplish this,
they selected 784 commodities in 1926 and established the volume of
each commodity for the vears 1923 and 1926, taking the mean average
of these 2 years. This fixed volume of each commodity has remained
substantially unchanged up to this date (1938).
In 1926 the average price of each commodity was ascertained by
taking the weekly market price for 62 weeks, adding up the numbers
and mviding by 62, thus getting the average price for the year 1926
of the individual commodity. This average market price for each
commodity was multiplied by the units in the fixed volume of such
commodity on the mean average of 1923 and 1925. Thus was ascer-
tained the* total amount of dollars received for the fixed volume of
such commodity when multiplied by the average price for the year
1926. Thus was ascertained the number of dollars required to buy the
fixed volume of such commodity. The products in dollars for each of
the 784 commodities were then added up. It was found, by this
giroeesfl, that the total volume of dollars required to buy the total
xed volume of the 784 commodities was 64.7 billion dollars.
The Department then declared this volume of dollars to represent
Uie volume of money required to buy the volume of commodities
listed. And for purposes of comparison with future years used an
NATIONAL SOONOMT Aim THB^IftAiqaN^ 2t
inito o! 100 to r^i«8«ht the piioe i0Td dl 1926 and ihB knimc^iiiM
Surchasing poWer of money in tlie wholesale markets loir 1(^^
ibyioudy^ following the same methods of x^culatton for 1027| when
it was ascertained that the total volume of money required to buj
the fixed yolume of commodities was 6 percent lees than 54^7 biUbn
dollars^ the index of the price level would fall 6 percent/ and ih»
dollar mdex would rise 6 percent. This would demonstrato that the
purchasing power of money in relation to commodities sold in the
wholesale markets had increased 6 percent in relation to a fixed
volume of the commodities.
The dollar index and the price-level index were exclusively con-
cerned with the actual purchasing power of money in the primary
wholesale markets. They did not concern themselves with the causes
of the changes in the selling price of commodities. These indexes
dealt merely with the question of price, regardless of the cause of the
price.
The dollar index and the price-level index were always in inverse
ratio to each other. When the volume of money required to buy the
fixed volume of commodities was ascertained, a comparison was made
with this volume of money and the $64,700,000,000. In that way
the index of the price level was obtained. When the index of the
price level was obtained, such as 94 in 1927, the index of the purchasing
power of money was ascertained by dividing 10.000 by 94 which gave
the purchasing power of the dollar in the wholesale markets at 106.
It was found for the year 1929 that the amount of money received
for the fixed volume of commodities was 5 percent less than the amount
of money received in 1926 for the same volume of commodities.
Therefore, the index of the price level was 96 and the dollar index was
105.
In May 1938 it was found that the amount of money required to
buy the fixed volume of commodities was 78 percefit of $64,700|000|000
and the dollar index was 128, showing that the dollars were buying
28 percent more of the fixed volume of goods than in 1926.
Since it took only 78 percent of the money required in 1926 to buy
the same fixed volume of goods, it not only showed the increased pur-
chasing power of money m the purchase of such goods, but another
very important factor had entered into the question of the purchasing
power of money, so arrived at.
HOW PRICES ARE INFLUENCEO
The prices in the wholesale primary markets are not only influenced
by the volume of money but are similarly influenced by tlie volume of
commodities. The dollar index and the price-level index pay no
attention whatever to the factor of the volume of commodities. The
volume of commodities, with the rise and fall in the volume of com- .
modities, is shown hy an entirely different index — the index of indus-
trial production, which shows the increase or decrease in the volume
of products (elsewhere explained).
if the volume of products should decrease 26 percent (the money
supply unchanging) the market price of such commodities would in-
crease by an inverse ratio of 33 percent.*
I For the reason that since thrae-fourths of the volmna woakl incraaaa (UM^ird In prioa, tha tommm a(
ona-thlrd in prica would ralsa tha ntunbar of doUMt to tha aama TOluzoa, or up to 100 pareant of aomal.
aaunUog tha moaay aupply arsilabla had not diangad.
26 NATI01?ia< iMX>NOMY AND THB BAICKINO BTSTBM
It mrould reqwe 54.7 billidii doUaro to purchase three^fonrtbs of the
Toltitne bj|.yi])i[ im increased ^ ^^^ of one-third. But the
actual index of the price level would show a rise of 33K percent and
the dollar index would be 75. The two multiplied together would
make 10,000.
In other words, the purchasing power of money in terms of such
commodities would fall 25 percent and the index of the average com-
modity price would rise 33 K percent.
If, however,, with a decrease of 26 percent in the commodities,
there was a decrease of 26 percent in the volume of money, the pur-
chasing power of money would remain unchanged in terms of com-
modities, because the volume of commodities and the volume of
money fell in the same ratio. _If the volume of commodities increased
60 percent and the volume of money increased 60 percent, there
would be no change in the price level or the dollar index, as the dollars
would buy the same volume of commodities as before.
If, therefore, the vohmae of commodities increased 5, 10, or 16
percent, the volume of money should increase 5, 10, or 16 percent in
order to preserve a dollar of the same purchasing power in terms of
commodities.
In 1929 the index of industrial production rose on an average of
19 percent above the 1923-26 average, but the volume of money in
the wholesale markets did not rise 19 percent. It rose less than 19
percent. If it had risen 19 percent, the price level and the dollar
index would have remained at 100, but the price level fell 6 percent
to 96 and the dollar index rose to 106, showing that the volume of
money did not correspond with the increase in the volume of com-
modities. Therefore, the purchasing power of money increased 5
percent for the year 1929.
In May 1938 the price-level index was 78 and the dollar index 128,
showing that the dollar was buying 28 percent more goods than in
1926^ notwithstanding the vital fact that the index of industrial pro-
duction in May 1938 was 76. In other words, the dollar was buying
28 percent more goods when the ^oods were nearly one-fourth less in
volume. When the goods were diminished in volume to 76 percent of
normal, the market price of such goods should have increased by
inverse ratio, or 3lK percent more than normal. Since the goods hy
virtue of their scarcity were worth 31M percent more than normal, it is
obvious that the dollar was buying 28 percent more than normal at a
time in 1938 when the goods were theoretically worth 31 X percent
more than normal. In other words, the volume of money was buying
28 percent more in volume of goods worth theoretically 131 K Jn market
value.
This is a substantial physical fact and can only be accounted for by
a greater contraction m the money supply than would be super-
ficially indicated by the price level of 78, or Ihe dollar index of 128.
The actual volume of money available, therefore, in the wholesale
markets in proportion to the goods was approximately 31 percent less
than 78 percent of the normal, or a contraction of the money supply to
a little over 50 percent of the normal supply of money in relation to
the normal supply of commodities as fixed in the year 1926.
The dollar mdex, therefore, should be about 170, in terms of com-
modities to represent actual rise in purchasing power.
In 1929 the volume of check monejr debited was 1,230 billion dollars
but in December 1938 it was approximately at the rate of 630 billion
NATIONA3L Rocmcmt ANp trm BA^ Bxwmm jn
dollars yearly, n contr«<etion <^ the Tolume of check money in t^
United States of more than half . This confirms, by actual statiat^eikl
facts, that there had be^n ibi the United States a contraction of check
money by over half from 1929.
When the ptirchasln^ power of the dollar increaded in termiol
stocks over 600 percent from 1929 to 1933, }t did not signify iJiat^thi
volume of money had fallen to ono-«ixth of what it was, l:^att8e in ihal
case, along with the shrinkage of check mone^ to one-third, there came
on the market a huge volume of stock certilicates which distreafled
owners of such stock parted with either from fear of further fall, ot
from necessity, because such stocks had been bought with bank loanA
that could no longer be carried. The oversupply of stock certificates
therefore, in the market had the effect of cheapening such stocks at a
time when the contraction of the money supply expanded the purchaa^
ing power of money and further cheapened the stocks in terms of
money.
The same principle applies in regard to real estate.' When the
depression came on, bankruptcies ensued, hundreds of thousands Of
shops were closed and offered for rental. The surplus of such shopi
and stores was available on the market in the depression when they
were producing^ no income and were subject to actual loss through
taxes, insurance, maintenance, etc.
The dollar index does not deal with these subjects which indicate
the purchasing power of money in the fields of real estate and stock$i
The dollar index concerns itself exclusively with prices in the primary
wholesale markets on 784 commodities, used up to 1938. The number
has been expanded to 813 since January 1, 1938. it is also true that
in making up the price level and the dollar index, in lieu of the fixed
volume oT commodities established by the mean average of the years
1923-26, the Department of Labor took the mean average of the
years 1929-31 as a new basis. The new basis, however, made no
substantial differen<e in the volume of money required to buy the
784 commodities (now 813) because the index of industrial production
was 119 in 1929 and 81 in 1931, makmg a mean average of 100, and
producing therefore an average of about 65 billion dollars which is
within a fraction of 1 percent of 64.7 billion dollars, used in 1923-25.
Tn considering, therefore, the subject of the dollar index and the
price level index, it should be obvious that they clearly make manifest
the extreme manner in which the volume of money available in com-
merce and industry has been contracted, and that the remedy must
be found in expanding the money supply with intelligent care so as to
restore the price-level index to par, and keep it at par by expanding
the volume of money as the index of industrial production can be made
to ej^pand under a system of regulating the value of money by regulat-
ing the volume of money in circulation.
In May 1938, theindex of industrial production fell to an extreme
low point and rapidly rose to 90 by October. This index was seriously
influenced by the expaftslim of money through the expenditure of the
Government and the change of policy which went into effect in June
1938. Moreover, in April 1937, when the index of industrial produe-
tion was 118, there were on hand substantial inventories which were
gradually reduced by June 1938. The inventories being low at that
time, production was stitnulatexl by that circumstance. This shuuld
not be overlooked in considering this question.
1233.'J8~39 .1
^ NATIONAL BO0NOlft AND THB BANKXNa SYSTBM
<l«%«MiiA*««* #«»4«T««'f
Tfaense and fall of the commoditids Ikted is hofmally and generally
due to the rise and fall in the money supply. There are some com-
modities that escape this normal rule for the reasdn that commodities
like copper, lead, steel, tin, and zinc are controlled by. monopoHes
that can arbitrarily fix the price. Thus the price will not go down
because of a shortage of money, nor will such commodities go up in
price, necessarily, l^cause of an expansion of money. But the ex-
pansion of nioney lays a foundation by which commodities controlled
by monopolies not only can be raised in price correspondingly with
the rise in other commodities, but it often happens, as in the case of
copper and lead, that when business conditions substantially improve
andf the demand for building purposes requires a larger volume of
copper and lead, the managers of the monopoly take advantage of
t^e conditions to arbitrarily raise their prices far above the average
rise of other commodities. In this way they have a tendency to dis-
courage building and to slow down the processes of a more favorable
market.
As elsewhere stated, the remedy for the arbitrary raisinjg of the
prices of commodities, such as copper, lead, tin, steel, and zmc, does
not lie within the scope of monetary control, but the regulation of
sujoh unfair prices fixed upon the public must be left to the Congress
wh^n passing laws to regulate the monopolies and unfair practices by
them, or practices against the public interest.
It has been urg^ by some economists that the depression of
1937-38 was due to the arbitrary raising of the price of copper and
other monopoly products. But copper and the products oi copper,
taken as a whole, only comprise about 1 percent of the average values
01 the b'sted conamodities on which the price level is based. The
effect of an arbitrary rise in such commodities would be to arbitrarily
increase, by an extremely small percentage, the price level without
such an increase being based on an increase in the money supply.
If the increase were due to an increase of the money supply, it would
mean that the increase would be accompanied by an increase in the
volume of production and employment, whereas the arbitrary in-
crease has no such foundation. When the price of copper was raised
business was active and continued to be active during January,
February, March, April, and May and the index of industrial produc-
tion rose until March and only began to fall as the marketing of
securities progressed and the hoarding of the money received from the
sale of such securities was carried on on a^raduafly increasing scale,
until the crash occurred in September. This has been elsewhere fully
wplained.
In short, the so-called disequilibrium of prices is not a monetary
problem, and even regardless of arbitrary fixed prices by monopoly,
the disequilibrium (so-called) of wholesale prices is necessarily due
to the larger or smaller supply of individual commodities in relation
to the demand for such individual commodities. It is only the value
of all of the listed conmiodities that indicates the changes in the
purchasing power and in the supply of money.
KATIONAJL BOOWOMT AN]> $H1B BANKmO STfiOmi
TRB YOLUlCKlorjMOHiT AND THS PBICB LBYBL
Under the law of supply and deihaiid, the demand for moni^ tii
pay for the 784 listed commodities manufactured in this country wlQ
depend upon the Supply of money ayailaHei in the ^holeisale com-
modity markets. The demand for money in the wholesale commodity
markets is by no means the only demand for money. Money may m
expanded in speculation in the security markets without necessarily
affecting the money employed in normal trade in the commodity
markets. '
This took place in the years 1924 to 1930, inclusive, when there wa^
a great expansion in the number of stock certificates sold to ^^
American people. There were sold, and Hsted on the stock exchangesl
over a bilUon shares in less than 10 years. The sales from 1922 td
1932 amounted to over $50,000,000,000. About $3,000,000,000 came
from abroad for the purpose of buying stocks on the American sef
curity exchanges.
The total loans made to brokers on the New York Stock Exchange
alone amounted to $8,600,000,000 by September 1929. The loan^
made in other security exchange markets amounted to about $3,000i
000,000 more. \f.
It had the effect on the New York Stock Exchange of raising th^
prices of common and preferred stock to a gross of $89,000,000,000,
When the credit was withdrawn, a violent shrinkage in the value of
these stocks took place. They were quoted for approximately $12,-
000,000,000 in 1932, at the low.
Check debits fell from $1,230,000,000,000 in 1929 to $430,000,000,-
000 in 1933. The effect of this contraction reflected itself naturally
in the increased purchasing power of the money in terms of stocks
that remained, so that dollars bought about seven times as much stock
at the low in 1932 as at the high m 1929. !
The effect on the price of commodities, however, was very much
less because commodities comprise the actual necessities, comforts,,
and conveniences of Ufe which the people employ day by day. There
was no speculation in the commodity markets during this period*
Therefore, the purchasing power of money in terms of commodities
fell only to 60 at the low point from 95 in 1929.
While tliis contraction in the money supply was taking place
and the demand bank deposits and convertible time deposits feU
from $34,000,000,000 in 1929 to $14,000,000,000 in 1932, the volume of
commodities also fell, due to unemployment. This made commodities
scarcer and, therefore, worth more in terms of money, and helped
to prevent the money rising higher in its purchasing power of com-
modities.
Money, therefore, is affected in its purchasing power not only by
the expansion and contraction of the volume of nioney but also by the
general expansion and contraction of the volume of commodities
ought and the volume of securities for sale.
The price level, or all-commodity index, might be affected by a gen-
eral drought that would make scarce all ^ricultural products and
influence the products of animal industry. h\ r^uiating the value of
money by r^ulatin^ the volume of money accoimt must be takect
therefore, of any national drought or state of war that would interfere
with the normal flow of commodities.
NATIONAL BCONOMy AND THE BANKING SYdTBM
Tliere m^ of ah individual
jBoininpiiity. If this 8uj>pl^ olwheat is in great excess of what the
Ametic^ people require mi wheat (or the substitutes available for
wheat) then wheat will fall in price under the law of supply and
id^&nd because of its superabundance. The same thing is true with
cotton or potatoes^ regardless of the volume of money. But, if the
Volume of money is expanded and the potato crop is only half the
jiionnal supply, the pirice of potatoes would rise very much higher
because of the two factors of scarcity of potatoes and unusual abun-
dance of money. If, on the other hand, the money supply was
greatly contracted and the potato crop was two or three times as much
as normal, in many places the potatoes would remain in the ground,
^o t worth digging up .
V It is extremely difficult to forecast whether a potato crop will be
superabundant or extraordinarily scarce, because it depends upon
many factors, particulariy climatic conditions.
, The United Staies Government, however, through the employment
of its present faciUties and its present laws, can regulate the value of
mone;jr in regard to commodities and all forms of property, leaving the
individual commodity to be Controlled by other factors which may or
may not be controUed by the Government.
The following table shows the annual supply of check money and
the rise and fall of the price level from the years 1929 to 1938.
Rise and fall of checks cashed and the price level
Checks '
Price
level
—
Checks 1
Price
level
1929
1,230
900
660
4fi0
430
96.2
86.8
72.1
63.9
65.0
1934
470
sno
6!1
637
530
74.6
1930
1936
79.8
1931
1936
80 6
1932.
1937
81.7
1983
December 1938
77.0
'Indicates billions and decimals thereof.
Source: Board of Governors of the Federal Reserve System.
Chapter IX
tHE RELATIONSHIP OF THE PRICE LEVEL TO FACTORY EMPLOYMENT
AND WAGES
It is of importance to understand the relationship of the price level,
or money supply, to fa_ctory employment and factory wages.
Naturally, when the money supply is severely contracted, there
will be a shortage of money with which to buy the products of labor.
And, therefore, the products of labor must be diminished because the
factories cannot afford to create products which cannot be sold.
When there is a great scarcity of money, therefore, the result is a
shortage of the means of paying wa^es, salaries, and carrying inven-
tories, as well as the means with which to buy the products of labor.
When consumption of the products of labor is cut down it results in
cutting down the production, which means cutting down the number
of tiiose employed in production.
Necessarily, a shortage of money means a lesser consumption,
lesser production, lesser emplo5anent.
NATIONAL BOONOMY AND THB BASnSINa STSratf ^
This reasoning is borne out by the statistical evidence collooted ^jT
the Department of Labor for a long peiiod of time. It is of impoiv
tance to imderstan^^l this vital fact: That factory employment and
factory wages fall when there is a contraction of the money supply,
and rise when there is an expansion of the money supply.
The following table graphically sets forth these comparisons for fh^
years 1920 through 1936.
The effect of the rise and fall of phe prici
' level on factory employmerU and loage*
Prices
Epyploy-
ment
Pay roll
Prices
Employ-
ment
Payroll
1920:
164.4
114.9
113.7
116.0
114.5
112.0
111.1
108.6
108.8
107.6
103.7
97.4
89.7
81.0
82.6
83.2
82.1
81.9
81.0
79.8
81.2
83.4
84.1
84.2
83.3
82.5
84.6
85.9
85.8
87.9
89.8
88.2
91,4
94.5
97.0
99.0
100.5
100.7
102.5
104.6
105.0
105.3
106.0
104.9
106.2
105 7
104.6
103.2
101 4
100.2
101.5
101.7
99.9
96.8
93.8
91.0
92.1
94.4
95.3
94.8
96.1
117.2
115.5
123.7
120.9
122.4
124.2
119.3
121.6
llfl.8
116.8
107.
98.0
82.8
81.3
81.7
79.0
77.3
76.4
71.7
73.9
73.4
72.6
71.7
73.3
69.6
72.4
74.9
73.8
77.2
80.6
78.6
83.0
87.0
89.6
93.4
95.7
94.6
97.9
102.5
103.8
107.3
107.6
103.3
103. 8
104.3
106.0
104,6
102.9
98.8
104.1
104.1
101.8
97.6
92.4
85,7
89.3
92.6
96.1
93.7
97.6
1925:
106.0
96.3
96.1
98.8
98.7
98.1
98.0
97.8
99.6
101^5
102.2
101.8
101.6
100.6
101.6
102.1
101.4
100.4
100.3
99.4
101.4
103.4
103.1
101.4
100.0
98.2
99.7
100.2
99.6
99.1
99.1
98.1
99.3
100 6
99.6
97.4
96.1
96.0
96.6
97.6
97.1
97.0
97.8
97.7
100.1
102.2
102,6
101.7
101.2
100.8
102.9
104.1
106.8
105.3
10S.0
100.1
107.0
100.0
107.7
103.6
90.8
95.4
153,9
106.4
100. S
166.0
106,6
102.4
161.9
103.4
100.0
les.o
102.6
100,7
160.7
104.2
98.7
1,1)9.4
106.3
96.8
153,9 .
loo.ii....:
106,8
99.8
IfO.O
1)8.8
140.0
> 104.3 -
104.6
130.0
I 104.4
104.0
118.7
103.4
10&.3
1921:
112 4 . .
1926:
103.2
100.
106
102.5....:
105.0
102 9
100.6
100.6
99.0
100.0
104,4
96,3 ..
100.6
103. t
93 S
100.8
103.8
93.3
99.7 .V.
99.0
93 8
98.7
103.4
93.8
99.6
99.1
104.4
93.8
107.6
93.2 -- -
98.0 ,.
104.1
92 6
97.4
108.5
1922:
91 6 - -
1927:
96.6
9^4
93.6
95,9 r
104.4
95.5
94.6 i
106.7
95.6
93.7
104.5
98 8
93.7
lOiO
990 . - .
93.8..
102,4
102.6
94.1
96.0
102.6
95.2
101,9
101 2
96,5
101.4
102 ....
97.0
102 1
103
96.7
96.0
103 4 - -
6fj,8
90.5
1923:
103 1
1928:
96.3
96.0
103 8
96.4
101. 1
105 - -
96.0
102.5
lO'iO
97.4
100.5
103 5
98.6
101. 3
1017
97.6
101.7
998
98.3
oe.t
99 4 ....
98.9
103.8
101 8
100.1
104.7
97.8
ioe.a
100 7
96.7..
105;
100
96,7
105,6
1924:
1000
1929:
97.2
10l9
100 5
96.7
100. t
99 3
97.6
Ul;«
983
96.8
113; •
95.8
n%,9
95 7
96.4
nhi
97 3
98.0
107.9
99 1
97.7
US.0
98 5
97.6
tix»
100 6
96.3
1114
101 1
94.4.
104.1
103.9
94.2
i9Q.r
M
liAi^iONAt BkJCM^oMt AM) ra^ BAifKma stsrsoi
^iU^««iofiheriieandfdUof^^ IwelohfaHary employrMnt and w»ge9-^Con.
. Prioii
Employ-
ment
PsyroU
Prleea
Employ-
ment
Pftyroll
1S30:
t 93,5
97.3
97.3
96.9
96.8
04.8
92.9
89,6
88.8
89,6
87.7
84.6
82.3
79.6
80.3
80.7
80.7
80.1
78.4
77.0
77.1
77.4
74.4
71.8
71.0
68.7
69.fi
68.4
66,1
63.4
61,2
68.9
60.1
63.3
64.4
63.4
62.1
95.9
98.8
98.8
97.7
96.4
92.3
84.3
83.3
84.1
82.2
76.8
76.2
70.0
74.3
76.6
74.4
73.4
69.7
66.2
66.9
63.4
61.3
68.1
67.6
63.6
64.6
63.1
49.6
46.8
43.4
39.8
40.6
42.9
44.7
42.9
41.6
1933:
62.0
6a2
61.1
68.8
69.9
62.6
66.9
71.6
76.4
80.0
79.6
76.2
74.4
73.3
77.7
80.8
82.3
82.4
81.1
78.6
79.4
76.8
78.4
76.8
78.1
78.6
81.2
82.4
82.4
81.1
79.7
79.6
39.5
©1.4
69.8
4a2
903
60.2
37.1
90.0
60.4
38.8
88 8
62.7
42,7
Mg
66.0
47.2
. 84.4
68.9
60.8
84,3
69.6
66.8
84.4..
70.8
60.1
88,0
71.2
89.4
91,8
71.1
65.6
79,8
70.8
64,6
mv.
78.2
1934:
72.2
54.0
78,8
73.6
60.6
780 »
73.7
64.8
78.4
73.3 -•
67.3
78,2 . i
73,7
67.1
72.1..
74,6
64.9
72.0 - - ...
74.8
60.4
73,1
76.4
6Z3
71,2
77.6
59,1
708
76,5
61.0
70.3
76.8
69,6
68,6
76.9
63,2
19«3:
67.8
1936:
78.8
64,1
88.8
79,6
69.1
88.0,
79.4
70,8
866 .. -.
80.1
70.7
84.4
80.2
68.6
83,9
79.8
06.6
84.6 .. .
79.4
65.3
86.3
80.6
86.3
80.7
83.6
86.3
84.8
84.6
72.1
84.4
80.8
76.1
83.9
80,6
74.6
63.6 . -
80.9
72.2
Bottroe: Hearings before the House Banking Committee on H. R. 7230, March 1938.
It will be observed that as the price level, which represents the
Tolume of money employed in buvmg all of 784 listed commodities
in the wholesale markets, rises or falls, within from 30 to 60 days, as
a rule, factory wages and factory employment rise and fall correspond-
The following table gives the high and low points for the same period
of time:
Table showing index price level, factory employment, and factory wages
(Al «mployment and wages have a short lag, the figures in italios below have their dates a month or two
later]
Commodity index
7lllitl030 166.7
jMUury 1933 down to - 91,6
AprUltoupto 1060
Jttil* 1W4 down to 96,7
▲mast 1938 up to 106.5
fiSlWdownto M.7
««plfmb«rlO»apto 100.1
OotoSw 1«3B 100. 1
ftSruary 1988 down to g»g
iiptombar lOBSup to 70.8
ICM 1086 up to 70,6
Factory
employ-
ment
Factory
wages
111.1
124.2
82.6
69,0
106.0
107.0
91.0
86,7
lon.t
10L9
88.9
98, t
lot, 9
108.9
100.0
113. 9
S8.8
S8.9
8ao
60,1
84.2
75.7
Botmtt: IBMHnp b«for« ths Committee on Anioulture and Forestry, Unltsd Statss Senate, 7&th Cong.,
D firm oomnodity iwloss, Juna 7, 8, and 9, 1087.
It is of importance to remember that for ^very man and Womiiii «ii|f
ployed in the factories there IB a oonstajit ratio of about two and oni^
half persons employed in other lines of business. In order, therefore/
to restore factory employment and other lines of employment to a
maximum, it is necessary to expand the money supply and to raise the
price level to at least normal, until a sufilcient amount of money is
supplied to pay annual living wages to all of those who iare able and
wilhng to labor in the factory, the field, the mine, and in the services.
THE PBICE LEVEL IN RELATION TO CAR LOAniNOS
The price level, representing as it does the relative volume of money
employed in the wholesale markets, should be compared also with the
index of car loadings as further proof that changes in the money supply
employed in the wholesale markets is accompanied by corresponding
changes in the index of car loadings.
The index of car loadings is based upon absolute knowledge of day
to day figures and, therefore, is very dependable.
The price
level and freight car hadinns
Year
\
Price
level
Freight
car load-
ings i
Year
Price
level
Freight
carload*
ingfii
1925
103.0
100.4
94.1
96.7
95.2
86.8
72.1
103
107
104
104
107
92
74
1932
63.9
65.0
74.6
79.8
80.6
81,7
&s
1926
1933
68
1927
1934
62
1928
193a . ..
64
1929
1936
76
1930
1937
78
1931
• Average per working day.
Source: Board of Qovernors o( the Federal Reserve System.
These carloadings, it should be remembered, indicate the greatest
factor in the revenues of railroads. Their falling off during these
years plainly points out that the most important reason for the distress
of the railroads is the contraction of the money supply in the wholesale
markets. The money employed in the wholesale markets represents
the diminished purchasing power of the consumers due to a contrac-
tion of the money supply.
THE EFFECT OP THE VOLUME OF MONEY ON THE VOLUME OF CON-
STRUCTION CONTRACTS
It will be noted that the index of construction contracts varied in
the same manner, substantially^ as carloadings and industrial produc-
tion. The index of construction contracts, as compared with the
J4 NATIONAL BCONOMt AND THE BANKINO SYSTEM
pi^« leyel^ or all-coi^ or volume 6f money employed in
the wholesale markets, for the years 1926 to 1936, inchisive, follows:
The price level and construdwn contract awarded (value)
Year
Price
level
Construc-
tion con-
tracts
awarded
(value)
Year
Price
level
Construc-
tion con^
tracts
awarded
(value)
19».l
100.4
94.1
96.7
95.2
86.8
72.1
129
129
13fi
117
92
«3
1932
63.9
65.0
74 6
79. R
80 6
28
1M7-.;
1933-..."";
25
192H
1934
32
»»:.. .;.......:. ..„.:
1935
37
10m.
1936...
56
1«81„,
Source: Board of Governors of the Federal Reserve System't
THE EFFECT ON EXPbRTS AND IMPORTS OF THE CONTRACTION OF CREDIT
AND THE MONEY SUPPLY
It seems desirable to call attention to the contemporaneous effect
upon our imports and exports as compared with the volume of checks
debited — money supply.
The following table shows these relationsliips:
Check money aiid exports and imports
(In billions and decimals thereof]
Year
Check
money
Exports
Imports
1989
1,230
900
oeo
450
6.2
3.8
2.4
1.6
4.4
3.1
2.1
1.3
1930
1931
1032,,.,
Year
1933
1934
1936
Check
money
430
470
530
Exports
1.7
2. 1
2.3
Imports
1.4
1.7
2.0
Source: Board of Oovernora of the Federal Reserve Sy?tem.
THE EFFECT ON OUR BUSINESS ENTERPRISES OF THE CONTRACTION OF
CREDIT AND THE MONEY SUPPLY
During the World War, when credit was greatly expanded, from 1914
to 1920, the normal number of business failures which occur from the
incapacity of individuals was diminished. When the contraction of
credit and currency took place in 1921, in the summer of 1920 and 1921,
these failures increased in number and in the amount of money involved.
The effect of the depression of 1921 on the banks of the country was
very serious, since it diminished the solvency of individual borrowers
and the value of investments held by the banks. When the depression
of 1929-32 came, these effects again reappeared increasing the number
of failures and the amount involved.
The effect which follows such a depression is not always immedi-
ately felt by the business houses or by the banks because men do not
fail until they are forced into failure. This takes a certain element of
time.
There is here inserted a table showing the munber of failures and
the amounts involved in business houses with the decline in the number
of banks in the United States from 1914 to 1935.
NATIONAL BCONOMY AND THB BANItINO 8T^T9B|
Dtdine in the number of hankt and commeretal failuret with amoufUt iwHtbkd
Year
1914
1915 1
1916 \
1917
19J8
19U9
1920
1921
1922
1923
1924
192«
1926
1927
1928
1929
1930
1931
1932
1933
1934
1936
Number of
Number of
Total
national
State
numb«rof
Nujnberof
banks
banks
h&ntn .
oommw-
(Juno 30 or
(June 30 or
(JUiie3M>t>r
> eial
nearest
nearest
ntsiswx
fUltlM
date)
date)
date)
7,814
18,760
26,274
18,280
7.697
19,008
26,605
22,1M
7,671
19,470
27,041
16.093
7,599
19,896
27,496
. 13,866
7.699
20,635
28,334
9,982
7,779
20,821
28,600
0,451
8,024
21,805
29,829
8,881
8,160
22,410
30.560
19,652
8,244
21,914
30,158
23,679
8.236
21, 597
'.>9,833
18, 718
8,080
20,916
28 996
20*616
8,066
20,413
28.479
21,214
7,972
19,882
27,864
21.778
7,790
18.976
26,766
23, 146
7.685
18,266
25,941
23,842
7,630
17,680
25, UO
22,909
7.247
16,606
23,852
26,366
6,800
16,103
21,903
28,385
6,146
12,901
19.046
31.822
4.897
9,622
14, 619
20,307
5,417
10,418
15, 835
12, 185
6,425
10,669
15.994
11,879
AouNtntflf'
(ltiinft>
ttooa)
8fl8.S
196. S
183.4
163.0
113,S
396.1
627.4
«23.ft
639.4
543.3
443.7
400.3
620. 1
488.0
483.3
668.3
736.8
938.3
602.8
264.3
330.1
Source: Board of Governors of the Federal Reserve System.
Students will recall where the contraction of money took place in
1921 and in 1929-32 it was reflected in the items above set forth
immediately. i^
Chapter X
thp: index op industrial production
The index of industrial production is based upon the volume of a
number of industries, under some 60 classifications, representing about
80 percent of the total of the national industrial production.
This index was based upon the years 1923-25 in order to give a
more stable basis of comparative calculation in succeeding years.
These calculations are made from a vast amount, of data and are
worked out by mathematical and economic calculations. A full
explanation of these calculations and the methods by which they are
made will be found in the Federal Reserve Bulletin of February and
March 1927, and reprinted in a pamphlet in November 1937.
The index of industrial production represents the percentage of the
volume of industrial production of 1 year as compared to the basic
average of 1923-25, which was put at the arbitrary figure of 100 for
purposes of comparison.
The kinds of industries used as a basis and their relative importance
are as follows:
RtmH
Data used in index of industrial production *^S?f*
Manufactures 86. 71
Iron and steel and their products ^._ __ 19. 77
Textiles and their products _ 17. 74
Food products _ ^ _ 9, 10
Paper and printing 10. 7j5
* Computed from average annual data for the S-base period fears, 1923-S5, with revisioni to 1937.
m
vkTionjjjmm^tmi kiiny^^^
p€Ua u§ed in ind^ <^ iiuii^ridl produeHcmr^pniinu^d *^f
sr »ik1 allied products _ ._, & 27
Tri|ipuq>orti|iion <^^ ..:-»-- _., 6. 36
)UMiil)ieGr iuid i^nUnufaHum - _ 3. 37
StoiML day, and glaaa products _ 2. 66
Metals and metal products, other than iron and steel 1. 76
Chemicals and allied products 1. 96
Rubber products _ _ 1. 87
Tobacco manufactures 1. 08
Minerals _ 14. 29
Industrial production 100. 00
8<mroe: Board of Qovemo j fA the Federal Reserve System.
The index of industrial production should normally expand at the
rate of 4 percent annually because of the increase of population, of
horsepower, and of Islectnc energy used for light, heat, and power.
As an example, power-producmg machinery in the United States
has mcreased from 704,266,000 horsepower in 1924 to 1,198,000,000
in 1^36. The increase of electric energy has been much greater than
4 percent per annum and the expansion of this power in process of
production may be expected to continue this increase for years to come.
In the Federal Power Commission's pamphlet "Electric Power Sta-
tistics" the following table appears, giving the expansion of kilowatt-
hours since 1920 through 1937:
Production of electric energy in the United States
Total i
1929 _ 95, 166, 46JJ
1930, 93, 866, 381
1931 90,089,862
1932 81, 827, 806
1933 _ 84, 176, 704
1934_-_ 90, 219, 967
1936 - 97, 811, 306
1936 111,431,367
1937-- 121, 049, 630
1920 42,664,014
1921 40,584,040
1922 47, 071, 804
1923. _ 64, 857, 797
1924... 68,137,300
1926 66,011,833
1926 73, 066, 002
1927- 78,579,669
1928 - 86,769,014
> TbouBande of kUowatt^bourv.
It will be observed that the total of kilowatt-hours has increased
from 42.6 biUions in 1920 to 121 biUions in 1937, nearly 200 percent
in 18 years or over 10 percent per annum; whereas our money supply
since 1926 has decreased at least 23 percent, as shown by the volume
of monej employed in the wholesale primary markets, the all-com-
modity mdex having gone from 100 down to 77. And our total check
money having gone from $845,000,000,000 in 1926 to an estimate for
the year 1938 of approximately $530,000,000,000, a contraction of
$300,000,000,000 m 12 years, or about 36 percent.
THB BELATIONBHIP OF THE INDEX OF INDUSTRIAL PRODUCTION TO THE
PRICE LEVEL
The price level, or the volume of money employed in the purchase
^f the 784 commodities in the wholesale markets, has a very important
relationship to the index of industrial production, as well as to factory
employment.
When the price level, or volume of money, rises in the wholesale
markets, the mdex of industrial production rises. When the volume
id money &ixkfAojfid m tb« wholaedle maiiEete ttXkf iht initetf Jeb
dudtrial produoiioii fallft^ , »
; For example: In 1929 the price level wm 96, and the iigbdear ^
industrial production waa 119, lor the average oi 1929. Ill JBtebfuarf
193S the index of the voliune of ttumev eni^loTed in the wholeaafo
marketB, or the price level, waa 60 ana tl^e index of industrial mH
duction had fallen from U^ to 64» In July 1938 the index of induamal
production Waa 81 while the price level was 78.8. i
It thus appears clearly that the volume of money employed in tlia'
wholesale markets not only indicates the purchasing power of monejr^
but it demonstrates that with the fall of the volume of money in tfo
wholesale markets, industrial production falls in correepondmg degreitf^
We have elsewhere showii that the price level, or volume of money
empl(»red in the wholesale markets, mdicates factoir emplo^finent)'
and' that factory employment rises as the volume of money in thar
wholesale markets rises. Of course as factory emplovment riaea
industrial production would necessarily rise* So that both the rea8C»i>
and the statistical fact should be penectly clear that the volume of
money employed in the wholesale markets indicates f actoiy employ-*^
ment and industrial production.
In dealing with factory employment and industrial production.v
the money employed in the wnolesale markets is therefore a vital
determining influence.
Since the rise and fall of the price level, or the money suppl:^,'
indicates the rise and fall of employment and factory production, it
is of importance to note the relationship between the price level and
the index of industrial production. Tne following table shows this
relationship:
Th€ price levd and ihe index of industrial production
Year
Price
level
Indexed
industrial
production >
■i Yaur
Price
teTel
Index €f .
Indmtriiil
prodoetkn%
W26
100.4
94.1
9C.7
96.2
88. 8
72.1
106
106
111
119
96
81
1933
68.0
66.0
74.6
79.6
80.6
81,7
M
1927
193S
Tl
1928
1934
911
1929
1936
1990
1030
106
1931
1937
lid
I Average per working day.
Source: Board of Qovemort of the Federal Reserve System.
Chapter XI
- .)
THE INADEQUACY OF THE PRESENT TERMS "THE PRICE LEVEL*' ANIk
"THE PURCHASING POWER OF MONEY*'
The present term, "the price level,'* based on the volume of mone^^j
employed in 1926, does not take into account any change in th#*
volume of commodities on which the price level is based. And, of
course, the term "the index of the purchasing power of money** also
ignores the change in the volume of the designated commoditaes.
It should be obvious that if for any reason the volume of such com*
modities should increase 4 percent per annum, the volume of money
employed should rise 4 percent, otherwise the money employ^ wciula^
buy 4 percent more of tne commoditieB and products of labor, wh^«a|i.
2g Mfumkii moo^om^^^
ft iddh^ cif imif oim i^^ the BAme volume of
ooiABQioditieB from one y^ar to luipil^ if labor is to receive a fair
rcfwiffd.iii dollan f orwhat it creates/and if the debtor is to be allowed
t0 jjftjr t^ creditor in^ dollars of the same purchasing power.
To ixicreaie industoial production requires an increase in the money
•up^ly up to the point that maximum employment of men and machin-
^ is achieved. Beyond this point no expansion of money seems to
be desirable^ and any serious expansion beyond this point might be
lyii^y disadvantageous as it would have the effect of unduly increasing
^ value of property and decreasing the purchasing power of money
in those fonns of property in which money is invested, such as stocks,
bonds, real estate, etc.
Many people have objected to any rise in the all-commodity index
b^ause it has been desienated loosely as ^'the price level." Many
people think, therefore, that raising the price level means only raising
the price of individual commodities which they wish to buy, for-
getting that increasing the money supply would end imemployment,
would create a rising individual income, individual wages, and in-
ereaae the market pnce of the products of labor. This is not true.
if the money supply were to rise 50 percent while the volume of
oomnKMiities rose 50 percent, the market price of the individual com-
modities on the average would not be changed, since the 50 percent
increase of such commodities would diminish the market price of indi-
vidual commodities in proportion, and the increase of the money sup-
ply would merely offset what otherwise would be a contraction m
the selling price of what, the people produce. Giving them a fair
price for what they produce, enables them to have the consuming
power with which to buy what they produce.
At last, the producers of the United States and the consumers of
the United States represent all of the people.
Individual commodity prices majr be raised by the scarcity of
individual commodities or may be raised by artificial means through
monopolies fixing the price of their products, such as copper, leadj or
apedal products. The question of artificially raising pnces unfairly
mroueh monopoly lies outside of the field of monetary science, except
to call attention to it as a factor of prices.
It has been complained that prices are artificially raised in construc-
tion by bricklayers, plumbers, and carpenters through labor unions
charging an. excessive price for their labor, as compared to the labor
of other people engaged in services to each other. This may be true,
but that question is a question which is no part of monetary science,
beyond pointing out the fact that stability in our industrial life, when
established through public monetary control, will enable the Govern-
ment to better control monopoly; and will enable labor, by virtue of
stability in continuous employment, to make contracts involving an
annual living wage, rather than the present precarious employment
of bricklayers, plumbers, carpenters, etc.
Chapter XII
THE MBTHODB BT WHICH MONEY IB EXPANDED AND CONTBACTED
The money of the country, consisting of currency and demand back
deposits, is expanded as follows:
The currency of the United States, which is required for pocket
money aiid to p&y for the purchases daily of products and services,
!• iiiint«4 and i»inted ^^b^ ttie Gbv«niiiieiit and dkinbutoA 14
baaka of tlie einiiitiy througii th« Fod«rid Reaenre banka, Ilia m
caU for the cumn^ to tha extent that they need it for tlia ptmilt^
and inunediate oaahing of ohedka by depoditoni. The ptofA^* mn^
fore,,q>btain^^thia^i^^ Irbm ti^ Op Wiiinaiit. Tlw Q<»mQ»aitl
ereatea aU of this money. The Statea are fbrlnddek to iaumximiiImB
it, and it i« a crime to oounterfnt it. Thia cumnqy ia uaad ia •
medium of exchange. When a merchant reodyea from hb mailOBiaii
more currency than he needs in his till, he deposits it with the baalou
When the banks receive more currency than they require, ikf9^
aend it back to the Federal Reserve bank of their district BXkd recMTa
credit for it. The currency may be returned to the Federal Reaerva
agent by the Federal Reserve bank if it has an excess. It not only
is employed as a medium of exchange hj the people, but~amn^ people
who have no bank account keep their utile supply of money in aoma
safe place as a hoard from which they ci^n obtain money for an|^
unusual demand, such as sickness, a birth or a death, or a marriaga
in the family. Sometimes this hoarding becomes excessive atut
ctii^es a dearth of the currency supply. So that this currency mi^f
be contracted bv the citizens who have it as pocket money. Tlua
occurs during a depression when money becomes scarce.
Demand bank deposits, upon which check money is drawn, are
created by loans and investments as described in a previous chapter;
It is of special importance that students should observe the mannety
in which the reservoir of demand bank deposits can be contracted
as a medium of exchange.
If the loan of a businessman is paid upon the demand of the bank^
or becailse the businessman wishes to pay it, it is paid with a chedi
on a demand deposit, and the demand deposit ceases to exist to
the extent of the amount of the check. From 1929 to 1933 such
business loans were contracted from 41.6 billion to about 21,2 billion
dollars, thereby contracting the volume of demand deposits and
of time deposits (which had been exchanged previously for demand
bank deposits), leaving the deposits of the banks 20 billion dollars
less than thejr had been in 1929. This was a contraction of the
demand deposits by the contraction of loans. The amount in which
demand deposits were contracted from 1929 to 1938 is shown by the
following table:
Contraction of demand depoaits and decline of bank loane
1929
1930
1931
1932
1933
Total loans,
all banks i
41.fi
40.6
35.4
27.8
22.2
Estimated
debits to
individual
aeoountcfor
all oommer*
cial banks*
1,230
900
«0
4S0
430
1934
1886
1986
1«37
ion
Total kNuii,
aUbuilttt
31.8
mi
sai
22.8
3L1
■eeoaplilBf
•Qooonlti**
S
> Id billions of dollars; June SO or nearest date.
* In bllliona of dollars; annual flfuies.
Source: Board of Oownon of the Federal BeairTe Syatam.
f0 xA^noMiO' wxm
u iliilffllbtiwi by t^ th^ United SUtee began in
ttiMK io mcreeee tlie nooni^ eiipiily 1^ the sale of b<Huii, the deposite
bem to liee again.
r It is ol die greatest impprtanee that etudente sbotjld tindentand
Ibat a deinand depQ«ii| which is hoarded by Uie depositor and kept
WMknployed awaiting future use or inveetxnent, does not function as a
aii^i^!™ of excham;e. A hoarded deposit is not used for the employ*
ttmit of human labor, for tibe payment of wages and salaries, or for
eairying invmtories of the products of labor. A hoarded demand
di|>OBit IS temporarily as useless in the national economy ofproduction
at if it did not exist. The Federal Deposit Insurance Con>oration
in October 1934 located many billions of demand deposits that were
hid as reserves. They were called dormant accounts.
8udi iiiactiye, unemployed demuand deposits contract the volume
el the medium of excnange existing in the form of demand bank
^T^lbiim the Treasury sells baby bonds to smaU demand bank deposi-
Im. it withdraws such demand deposits. The proceeds of the sale
of the baby bonds become dormant accounts until expended by the
dovemment. When the Government sells its bonds through the
banks to the citizens, it has the same effect of temporary contraction.
When it sells its bonds to the banks and the ba.nks retain the bonds,
the volume of demand deposits is increased until the bonds are paid
1^. When the bonds are paid off they are paid off through taxes
eoUected by the Government from demand deposits. And, therefore,
the payment of the national debt by taxation, without any further
eixpansion of the demand bank deposits, would reduce demand bank
deposits to zero and cause universal bankruptcy.
Whenever the Government collects money by taxes it contracts
temporarily the demand deposits, or the money supply. About
$4,000,000,000 of tlie present demand deposits are held by the Gov-
ernment, the States, and their subdivisions, as heretofore pointed out.
Wh«i corporations, States, cities, or counties sell their bonds to
the banks they create new money because the banks create and give
them demand deposits in exchange for their bonds. The banks
therefore create money by their investment in these bonds. When
the bank takes the bonds, it, in effect, makes a loan to the State,
city, coimty, or corporation. When such bonds are paid off, they are
paid off with demand deposits as to the proceeds of taxes, or as divi-
dends arising from profits to the corporations.
When a corporation sells its goods to the public and receives there-
for a net pront, it withdraws the net profit in the form of demand
deposits.
When an insurance corporation receives its preimums and makes a
iwt profit, it does "So by withdrawing from the country demand
depOMts. This is a contraction of credit process. When these
moneys are paid out in dividends they are paid out in demand deposits
•lid expand demand deposits again, as a cu»culating medium.
When any creditor receives mterest on bonds or on loans or debts.
be ift^paid ill dema»d deposits. .The demand deposits may then and
there be withdrawn from circulation as a reserve for future investment.
During the last few years $6,000,000,000 or $6,000,000^000 of gold
kts come into the United States for the purchase of American dollars.
Thk gold hftf b««Ki bouf^l by lh« Umled SMai tlnough ih^
of bonds and ooiivertod mto gpld certificates w hicah hayc De«;t d
or pledged, to the Federal Reiervi» banks, Wbeii the Qot
bought this goM thfhr contracted the money sii|m|y/t6 tlie
represented by the gold, and When they iiiUea their oondi hi ]>i^^
they expanded the money supply ihroU|^ demand depoeila. The neH
result of these transactions was to prey^t a&y emiaaion of monetaiy
credit by the flow to the United States of thft gold.
It was a contraction process when the $2,000,000,000 8tabiliaati0h
fund was established, as it withdrew from circulation that amount of
fold or its monetary ecjuiyalent. When the Qoyemm^t sterOiUd
1,500,000,000 of gold, it was a credit contraction process.
A member bank may contract demand deposits by seliing its bqbdi
to the demand bank depositor, or by selling the depositor time depotilli
in exchange for, his demand deposit, or a savings account in excnange
for his demand deposit. A member bank, when it collects intereai
on its loans and passes such interest to the account of undivMed
profits, contracts demand deposits to that extent because the baiik
18 pdd out of demand deposits by the borrower who owes the int^tiit.
When the Federal Reserve banks buy the bonds of the Umtsd
States, it will be an expansion of the mone^r supply. If bought frdu
the citizen who holds such bond, the citizen would sell ms bottd
through his local bank, receiving demand deposits for the b<md ahd
the bank would transmit the bond to the Reserve bank as an addi-
tion to the bank's reserves. Such a transaction would increase dm
reserves of the member banks and increase the volume of demand
bank deposits in the bank through which the sale was made^
If the Reserve bank were to buy a million dollars of bonds from a
member bank, it would increase the reserves of such member bank
by $1^000,000 in the Reserve bank but would not add to the demahd
deposits of citizens engaged in industry. It would, however, facilitate
the opportunity of the bank to lend such money to the citizen.
If the Reserve banks were to buy from citizens on the open markejt
State bonds, county bonds, city bonds, or corporation bonds, it
would have the effUK^t of increasing the reserves of the banks whi^
sold them to the Reserve bank. If they were bought from atizeili
it would increase the demand deposits of the citizens and also increase
the reserves of the member bank through which the transaction waa
made.
The Federal Reserve banks^ therefore, have the power to expand
the money supply to whatever extent is necessary to achieve maxi*
mum employment, maximum production, maximum consun^ptibil^
and to restore the dollar index to the predepression normal oi IQO.
They have the power to contract the money supply by selling the same
secutities back to the citizens who have demand deposits.
The Government, therefore, has the power, thmugh the Federal
Reserve System, of expanding and contracting the money supply to
whatever extent the public good requires. They can correct' ttia
present scarcity of money and they can end the indefensible Ccoi-
traction of the money supply which has taken place since 1929.
They can prevent any indefensible expansion of the money supply
(demand deposits or bank credit) by selling the bonds and so^wl
bankable assets previously bought.
1^ iliks )>^ «k ha^t of^ ihoie dkc^^ the tum-oVer of demand
JMUaJi deposits by checi^ to speak of this turn-over as ihe velocity of
nooikey. They deiennine Uie velocity by the nun^ber of times the
|i(»tai of demiftnd bank deposits is contained in dii ^voku^e of checks
dM^ted on U^e books of aD the banks.
1^ conception ignores the fact that the total volume of demand
b*iik deposit represents the holdings of millions of depositors,
represents deposits which turn over 1(>0 times per annum, and other
deposits that turn over once or twice, or perhaps not at all during a
given year.
Jn recent years it has been learned that in periods of active business
Und f ull confidence, a very large part of those deposits turn over at
Ihe high speed, and a comparatively small percentage are inactive
iwad dormant.
In times of depression, it has been found that inactive and dormant
ACCOimts comprise a very substantial portion of the demand bank
deposits. Therefore, it has become necessary to clearlj^ appreciate
and to ascertain by a proper inquiry the extent to which demand
deposits are dormant, inactive, and not vigorously functioning as a
medium of exchange, economically employed in the rapid transaction
of daily business.
The Federal Deposit Insurance Corporation, in 1934, found that
$0,000,000,000 of demand deposits were held as reserves by corpora-
tions and individuals for future investment.
In 1929 the total turn-over of demand deposits reached approxi-
mately 60 times the volume of demand deposits. The demand
deposits were $24,000,000,000 and the volume of checks debited was
$1 ,230,000,000,000. But there were $10,000,000,000 of time deposits,
quickly convertible into demand deposits, in that year. A sub-
stantial part of these time deposits were functioning as demand
deposits for the reason that the reserves required by law to be held
by the banks against time deposits were small and the amount required
to be held against demand deposits was large. In 1938, after the
panic of 1937, about $4,000,000,000 of $26,000,000,000 was held by
the Federal Government, State governments, and their subdivisions,
received from taxes and in process of expenditure, and that the
expenditures were being constantly replaced by taxes collected from
demand deposits of those who pay taxes.
The estimate made by the Government that the average turn-over
for 1938 would be $530,000,000,000, would indicate ..that only
$11,000,000,000 of demand deposits were turning over at a pre-
depression normal of 50 times per alnnum.
Thoughtful students will therefore beware of treating all demand
deposits as moving with the same velocity, for this is by no means
true.
HOW DEMAND BANK DEPOSITS CREATED BY THE GOVERNMENT FLOW
INTO USE
The question has been raised that perhaps new demand bank
deposits, created bv the purchase of Government bonds by the
Beserve banks, would remain unemployed and idle.
Those who sell interest-bearing securities for the purpose of obtaining
liquid money do so because they wish to invest such money more
ptofitikbly. Som» of tlieoi m%i^l ]^^ dotniuiti imtic^iAlisif tti^^
favoraUf opportimkf for mTw^n^ iroiild Im» «iil^^
immaterial p^use there ie no limit to whid^ Uieee d^>06lt« ooiit^ W
inoreaaed^ if nebeaeaiy^ to cause an additio&al iioedliim «^ i^^
f miction, It aliollld be obvioua, ihff^^^&t, j^i Wbetl tt i^c^^uili^ m,
famishing for ready money, the deixiimd for it will esuse tiie mm
liquid money to ftow into commerce, induatry^ aiid invealiii^t,
What is of the greatest importan(3e to obftMre is that the preset
money, in the i<>rm of demand deposits held by those WJM) merchandise
in money and stocks, will cease to be dormant whenever the Governr
ment declares its purpose to ex{>and the money supply with a view
to expanding employment. This is exactly what the dormant ac-
counts are waiting for. They are waiting for evidence of a dependable
rising market.
Wiien, therefore, the Congress declares a national monetary policy
and instructs the Board of Governors of the Federal Reserve System,
the Treasury Department, and the Reserve banks to make effective
such a national monetary policy, those who have been speculating in
money, those who have been hoarding money, those who have been
holding monev as reserve, and those who have thus contributed to a
cornering of the money supply, will make haste, because of the profit
motive, to invest money, which threatens to fall in exchange value, for
property, which promises to rise in market price.
Those who are merchandising in money with a view to speculative
profits are well advised by tramed monetary experts, who tell them
when it is desirable to accumulate money, and when it is desirable
to invest money in stocks and other forms of property. There need
be no fear that those who merchandise in money will fail to act with
intelligent self-interest in search of profit.
Thoughtful students will perceive the great importance of this
suggestion.
THE MONEY CREATED BY THE PEOPLE
It has been pointed out that the failure of the Government to furnish
the growing nation with a sufficient amount of money to transact a
vast expansion of commercial business resulted in the people creating
money tor tliemselves through National banks and State banks. How
this was done, through private and public loans, has been described. ;
But it is of importance to understand the volume which the people
have thus created for their own convenience.
Taking the figures of 1929, before the panic, the people had created
$55,000,000,000 of deposits in the banks. These deposits con8iste4
of savings accounts, tune deposits, and demand bank deposits^ The
savings accounts and the time deposits had been obtained from demand
bank deposits previously existing which were sold or transferred to
the banks in exchange for time deposits and savings accounts. These
savings accounte and time de^sits of course could be converted into
demand deposits by the depositors, at their will, after an agreed uum*
her of days' notice.
The savings accounts had great stability because they represented
money which prudent people kept in reserve for use in case of some
unexpected exigency. The demand deposits were about $24,0()0,-
000,000; the time deposits, about $10,000,000,000; and the savings
M^^ Tfals did not hiclude the postal
lliti^, nor Uie i otiif W n^
^;^S6i it mf^ be roucthl^ said^ thiat iJie people of the United States
li^inanufactiii^ weir own money^ boldmg at that time about
$24,000,000,000 of demand dejposits as an available medimn of ex-
flange and $31,000,000,000 oi time and savines deposits, while the
banks had an additional $5,000,000,000 of interbank deposits created
by loans to, or deposits with, each other. In addition to this money,
there Was about $7,000,000,000 of bank capital, including their surplus
and undivided pronts.
The savings accounts and the time deposits were, as heretofore
stated, money in storage and not employed as a medium of exchange
in the transaction of monetary business. The people of the United
States, through the svstem of corporations and the security exchanges,
where the stocks and bonds of such corpoiations and of governments
are traded in, ^ad set up a vast machinery by which over
$100,000,000,000 of such securities could be converted immediately
into liquid naoney. These stocks and bonds, going into colossal
figures, were investments of the American people, out of which they
not only received dividends, but upon which they could rely in case
of need to obtain liquid money by immediate sale in the security
markets. On the New York Stock Exchange alone at present are
1,400,000,000 shares of common and preferred stock.
There are many other exchanges and there are over 300,000 corpora-
tions whose stocks and bonds are not listed, but whose book values, as
shown by the records of the Collector of Internal Revenue, exceed
$155;000,000j000 as of December 31, 1929.
Reference is made to these organizations and to the national wealth
to show that the volume of money created by the people for their
own use has been greatly in excess of what they recjuire iri the form
of liquid money, or demand bank deposits circulating as a medium
of exchange, tt is because of these great values and investments of
the people that they have required so large an amount of money as a
medium of exchange and as a storage of value.
Students will thus realize that the volume of checks debited on the
-books of the banks in 1926 ($846,000,000,000) is not surprising in
view of the active dealings of the people with each other in the prop-
erties involved.
But since money is not only a medium of exchange but is a measure
of value, it becomes of supreme importance that the Government
should control and manage the volume of money required as a medium
of exchange and measure of value. If the medium of exchange were
expanded beyond the actual needs of the people for exchanging
their products and services, it would result in inflation without
^ding anything to the convenience and necessity of the people for an
adequate medium of exchange.
For this reason it becbmes vitally important that the Government
should not only regulate the volxime of money in order to regulate
the value of money, but should accomplish this through a statute
setting up a sound national monetary policy that would always
furnish the people with an adequate supply of money without
inflationi wMch Woidd u^dul^ expajld t^^ of prbperfyJ
Such a ^Tstem would be fortiQed equaHy against any inflatiDn and
any indefenBible <M>ntraction of the money supply It should be
implmented through competent executai^^ by law
to cany out the national monetaiy |K>hcy dMared by Oongt«8B;
(The . quantity of money currently required has been heretofon^
explained.)
CREDIT EXPANSION THROtJGH THE SALE OF STOCKS
. In 1900 the stock certificates on the New York Stock Exchange
amounted to 66,090,180. These certificates increased by less than
1,000,000 shares per annum until 1920, when they amounted to
220,763,423. But by the end of 1931 they had increased to 1,296,-
MUlloM
of tharet
1400
1300
(80IIH XX SBABIS U8fBD, 1900-19S1
1000
8X
600
400
200
99* of
XtfMS
1400
1900
1000
000
600
400
aoo
Ok o* <n Qt at ot a* o> o» cn <n ot at o»oiotcnO)0'Ok(A(A(noioioioi<A<no>o» o*
Source: New York Stock Ezobangd Bulletin
794,480 (these figures are for January of each year, common aiid
preferred stocks combined). A chart, taken from the New York
Stock Exchange Bulletin for August 1931, showing this trend, follows;
The number of issues increased from 377 in 1900 to 691 in 1920
and then to 1,308 in 1931.
Students will observe that beginning with 1921, the number of
shares increased over 1,000,000,000 by 1931 which were sold to the
general public and paid for by checks iawn on demand bank deposit^.
During the 10 years from 1921 to 1930, inclusive, these stocks sola
for $50,000,000,000 to the public and were paid for through the use of
demand bank deposits. There was thus an expansion of ci^edit ija
the form of salable stock certificates of about $60,000,000,000.
In addition there was a sale of corporation bonds to the public*
The New York Stock Exchange gives these figures frbm 1926 t(>
August 1931, in the following table:
DotaonaUUtUd b<m4t
JHU
Number
of Is-
men
Nttitib«r
OfiSSOM
ATuras*
prio*
Parvaliwot
listed bonds
Tot«] market
value
S$h. 1/1920..
Jml 1,1927. .
Im, 1.1038..
Jth. 1, 1920..
Jim. 1. 1930..
Atig. 1, 1930.
8«ptM,1030.
Oot. 1.1030..
Nov. 1, 1930.
Dec. 1» 1930..
Jan. 1, 1031..
Feb. 1. 1931..
Mar. 1, 1031.
Apr. 1,1931 -
May 1^1931.
Jdne 1,1931.
July 1,1031..
Aug. 1,1031.
824
824
840
842
840
840
»37
838
a36
837
836
836
836
830
842
1,332
1,367
1,420
1,491
1,634
1,543
1,573
1.578
1,607
1,616.
1,600
1,607
1,602
1,605
1,610
1.605
1,608
1,608
1,608
194.79
95.98
98.06
99.98
97.51
95.59
97.47
97.69
97.38
96.47
96.74
94.63
. 96. S2
95,53
95.42
94.84
93.67
94.77
93.14
$36,457,
36,996,
37,900,
36,881,
48,588,
49.058,
60, 375,
60, 467,
50,027,
60, 191,
60,094,
50,072,
49,881,
60,108.
60, 788,
50,911,
50, MS,
51,846,
51,938,
811,874
089,633
053.660
320,122
549.854
099.434
127, 717
382,317
129,663
572,803
547, 694
879,897
922,059
076,488
606,210
76S, 944
675,244
247. 978
698, 878
$33,611,
35,609,
37.167,
36,874.
47,379,
46,892,
49, 101,
49,293,
48,715,
48,417,
47,959,
47,384,
47,546.
47,869,
48,463,
48,282,
47, 629,
49, 132,
48, 375,
817,346:
211,458
607,468
717,458
028,602-
458. 780
898,301
768,598
222.900
892, 161
730,628
805,889
190,092
817,156
021, 490
336,086
698,234
895, 763
746,828
Source: New York Stock Exchange Mulletlns.
The sale of these securities was affected by discreet advertising
campaigns and by bodies of salesmen trained to dispose of such
eecuritifes to individuals.
It resulted in a bull market which began to recede in 1929, when
the loans of the banks contracted from $41,600,000,000 by $20,000,-
000,000 at the end of 1932.
The effect of this expansion of credit and contraction of credit in
the value of the securities sold will be seen from the following table:
Expansi on and contraction of the average market price of securities
Date
Number
of Issues
Number of
shares
Average
market
price
Date
Number
of Issues
Number of
shares
Average
market
price
July 1,1925.....
July 1,1926
July 1,1927
July 1,1928
July 1,1929
July 1.1930
July 1,1031
968
1,066
1,076
1,118
1,238
1,319
1,296
462,696,000
642,866,000
623,764,000
688,360,000
945,341,000
1, 231, 273, 000
1,303,489,000
$64.19
65.59
67.27
76.89
81.73
51,89
36.38
July 1,1932
July 1, 1933
July 1,1934.....
Julyl, 1935
Jiily 1. 1936
July 1, 1937
July 1,1938
1,263
1,207
1,203
1,184
1,194
1.236
1,256
1,316,172,000
1,286,081,000
1, 294, 762, 000
1,304,146.000
1,339,680.000
1, 3fi9, 6,50, 000
1, 426, 893. 000
$11.89
28.29
26.20
27. 78
38.00
39.21
29.41
Source: New York Stock Exchange Yearbook and monthly bulletins.
Students will observe that the average market price per share for
1929 was $81.73, and was only $11.89 in 1932, showing an increase in
the average purchasing power of the dollar of over 600 percent in 3
years.
The expansions of credit through these processes were man made,
were uncontrolled by the Federal Government, and were incai)able of
control by individual bankers, who were, nevertheless, exercising the
legal right to manufacture money in the f^rm of demand bank de-
posits, and contracting money so made through the simple process of
r69uiring the loans they had made to be paid off. The legal right of
privately owned banks, State and national corporations to expand and
contract the money supply of the country without pvernmental reg-
ulation, fully explains the financial and commercial disaster which
began in 1929 and has not yet ceased (December 1938).
^ Ghapteb XIII
MONEY W CIRCULATION AS AN INDEX OF NATIONAL INCOIIB
The National Bureau of Economic Research, in New York, toti*
mated the income of the people of the United States f or the vears
1919 to 1933 in terms of the current purchasing power of the dollar
for each year and also in terms of the purchasing power of the dollar
for 1929. A table comparing these figures with the price level, or the
volmne of money employed in buying 784 commodities in Uie whole*
sale markets follows:
The price level and the value and volume of national production *
Price
level
National production
Year
Price
level
National i»oduoti<m
Year
Current value
of output
Volume of out-
put valued at
1929 prices
Current value
of output
Volume of oat'
put valued at
1919
1920
1921
1922
1923
1924
1925
1928
135.6
166.6
93.4
96.3
100.3
94.9
103.0
100.4
$62,022,000,000
74, 494, 000, 000
47,292,000,000
51,219,000,000
63,121,000,000
60, 047, 000, 000
65, 047, 000, 000
68.610,000,000
$60, 383, 000, 000
62,069,000,000
46,346,000,000
52, 125, 000. 000
«), 727, 000, 000
58,6l6.(X)0,00o
62,860,000,000
66, 688; 000, 000
1927
1928
1929..-.-
1930
1931
1932
1933
94.1
96.7
95.2
86.8
72.1
63.9
66.0
$66,118,000,000
69,294,000,000
71,290,000,000
59,899,000,000
44,302,000,000
28, 287, 000, 000
» 35, 442, 000, 000
$66,922,000,000
68,600,000,000
71,290,000,000
64, 054, 000, 000
M, 487, 000, 000
40,426,000.000
149,857,000,000
> Includes production of raw and finished commodities, construction and output of services directly related
to production, transportation, and distribution of commodities.
'Preliminary.
Source: National Bureau of Economic Research,
Pederal Reserve System.
Not published currently. Board of Governors of th»
In 1919 and 1920 there was a great scarcity of commodities due to
the World War and the withdrawal of many millions of men from works
of destruction to works of production. There was great speculation
in such commodities and therefore the volume of money employed m
the wholesale markets rose to an excess compared to normal. This
speculation was suppressed by the contraction of credit and currency
of 1921, whereupon a new speculation took place in the sale and market^
ing and trading of securities as heretofore explained.
The variation in the estimate of national production, above shown,
is accounted for by the fact that the index of industrial production for
1929, for example, was 119; and for 1933 was 76. This made an
important difference in the actual purchasing power of money because
in 1929 the volume of commodities was 19 percent above normal and
in 1933 it was 24 percent below normal. (See chapter on The Dollar
Index and the Price Level.)
The figures used by the National^ureau of Economic Research are
not as extensive as are the figures employed in the more recent work
by the statisticians of the Department of Commerce, who found thiit
the national income was $81,000,000,000 in 1929 instead of $71,000,-
000,000 having employed a broader basis in their estimate. For
purposes of comparison with the amount of money eniployed, these
differences are comparatively unimportant. The national income,
however, as estimated b^ the Department of Commerce from 1929 to
date, is here included with a comparison of the price level for each of
u
yem: that is, iek comp^^ of money eiaployed
in tile wiioieBale coixmioditj imarkets for the purchase of 784 com-
iiW)di<40B.K It must always pe r^emb^red that the price levels from
1926 to date^ represents only a percentage of the $54,700,000,000
employed in 1926 for the purchase of a fixed volume of 784 designated
eommodities in the wholesale markets.
The price level and noltonot income
•
Year
Prio«
level
it»..
95.2
S»::.
80.8
mi...
72.1
W82...,
63.9
UB8
6S.0
National
income
produced >
81,128
68,302
53,822
40,014
42,256
Year
1934
1935..:....
1936...:...
1937
1938 (July)
Prioj
level
74.6
79.8
80.6
81.7
79.0
National
income
produced >
60,052
55,186
63,466
69,817
> 30, 000
\ Xn inillloiui of dollars. /
* Katimate^ for the first half of 1938.
Sooroe: Survey of Current Businen, June 1938.
Board of Ooveroors of the Federal Reserve System.
Since the income of the people of the United States determines their
ta3q>aying power, we show a comparison of the check money employed
Annually and the annual Government income.
Comparison of check money employed annually and Government income
Fiscal year ending June
1832
IMS
19M
vm
Check
money >
460
430
470
630
Total
Treasury
receipts*
2.1
2.2
3,3
40
Fiscal year ending June
1036
1937
1938
Check
money >
611
637
>630
Total :
Treasury
receipts*
4.1
5.2
6.2
> In billions of dollars.
* In millions of dollars.
• Estimated.
Souroe: Board of Oovemors of the Federal Reserve System.
According to the estimates of the Department of Commerce of the
national income of the people, beginning in 1929 mth $81,000,000,000
and ending with $67,000,000^000 m 1937, it is obvious that the people
of the Umted States^ bv virtue of the depression of 1929 and the
collapse of bank credit, nave failed to increase their national income
by the normal increase of 4 percent. Not only have they failed to
increase their income by this amount, but have actually suffered a
loss. In 1930 the loss was $13,000,000,000; 1931, $17,000,000,000;
1932, $41,000,000,000; 1933, $39,000,000,000; 1934, $31,000,000,000;
1936^ $26,000,000,000; 1936, $18,000,000,000; 1937, $12,000,000,000;
making a total loss of $197,000,000,000 besides failing to gain 4
percent per annum on $81,000,000,000, or 32 percent of $81,000,000,000
by 1937.
The loss of 4 percent per annum for 1930 on $81,060,000,000;
t)ie loss of 8 percent for 1931 ; the loss of 12 percent for 1932; the loss
of 16 percent for 1933; the loss of 20 percent for 1934; the loss of 24
perpent for 1935; the loss of 28 percent for 1936; the loss of 32 percent
tor 1937; and the loss of 36 percent for 1938 would make a total loss
THAHlOVAL^mSGHKmr AND TBS 8A»lftXKQ STVCmi 40
of 180 percent on $8i,000,000>000 equal to a lotss of $H5,a()0«Q(W«lM|
which could have been aohoeyed under. a wiser monetary fl|y«teak^^
government with stable money, . ; , ;
This makes a total loss of $197,000,000^000 plus $14S,800,0()0.000.
or $342,800,000,000. We failed to gain $145,800,00d>000 and we
actually lost $197,000,000,000. This demonstrates what the futi^»
holds for America under a wiser system of stable money, stable
business, stable capital, and stable labor.
These figures emphasize the fatal effects of leaving the volume and
value of money in private hands, that are moved by optimism^ and
fear, instead of carrying out the constitutional mandate, whicfa^
gkve exclusive power to Congress to create money and the specifie
duty '*to r^ulate the value thei'eof."
If, therefore, under Government control of the money supply, an
adequate supply of money should be provided for maximum en^ploy?
ment and industrial production, it is perfectly manifest that the
people of the United States will soon be enjoying great abundance^
ending unemployment, public reUef and pnvate charity, balancing
the Budget, lowering taxes, and putting an end to undeserved poverty
in the United States. This can be accomplished only by an informed
public opinion which reflects itself in suitable legislation in the Con*
gress of the United States.
THE VOLUME OF MONEY EMPLOYED IN ALL ECONOMIC ACTIVITIlft
The price level deals only with the volume of money employed ill
the wholesale commodity markets, which comprises only a small
gart of the volume of money employed in other fields of our economic
fe. ,
Money is employed on a colossal scale in trading between individual
and individual and corporation and corporation in the many stepa
through which raw materials go in the process of production iihul
they are finally prepared for consumption. Money is used on a vast
scale in the purcnase and sale of real estate, and in the purchase and
sale of all sorts of property and eqi^ties, Money is employed not
onlv in the payment of wages and sMaries, in carrying mVentoiiei»
and in producing commodities for the markets, but is used on a ya^t
scale in the transportation business, and in the transmission of intelli^i
cence by mail, telephone, tele^am, radio, and cable. It is iised oil 4
large scale for the payment of mterests on debts, and for the piymenl
of taxes to the Nation, the States, counties, and cities. It is iised on
a large scale to pay for the public-utility services, water, gas, eleetncr
lights, and power. It is used on a vast scale in the buying and seUinfir
of securities on the various security exchanges throughout the United
States.
Fortunately, we have not only a knowledge of the amount of money
employed in the whol^ale commodity markets for the purchase of
784 different commodities but we> have positive and absolute knowl-
edge of the volume of money used in tne transaction of all lines 6t
business when the money is paid by check. This check money hai
been carefully calculated witn dependable accuracy by the Federal
Reserve Board. The figures have neretof ore been given.
In addition to this use of money, as recorded by the checks debited
on the books of the banks, the people have as poclcet money probably
JbAtf ol ilia eiimikeV^ outsidid of tli« United ^totasTreas^
wty* > Itim total ol sueb.outataadingemmlation baa been giren^ It
ii jMTobable Uiat the people bave aa pocket money a]>prozimately
$3,00Q^(M)0,000; some of which is kept noarded as a savings account
Wpeo^e who bave no bank deposits.
The individtial turn-over of money may be daily. Where check
money is employed in transactinj^ an active line of business, the daily
"ifi^me may be daily used to liquidate the debts of the merchant.
The average annual tiu^-over oi demand bank deposits, on which
•checks are drawn, was 50 times in 1929. A small unknown portion
of these deposits had no turn-over, being held as reserves and for
investment.
So that the actual turnover of those deposits, which were in active
employment for the transaction of business, was higher than 50 times
per annimi.
In 1932 when the demand deposits reached a low point of about
$14,000,000,000, the total check money turn-over was $450,000,000,-
000^ or about 32 times per annum. Assuming that the demand de-
posits Which were actually employed in active business were turning
over at 60 times per annum, it would have taken only $9,000,000,000
of d^and deposits in active circulation to have produced $460,000,-
000,000 of check turn-over, indicating that there was at that time
probably $5,000,000,000 of demand deposits held as reserves or for
future investment, and thus withdrawn as an active circulating
medium*
At present, July 1938, the total demand deposits amount to about
$26,000,000,000, of which about $4, 000,000 jOOO are held by the Federal
Government, the States, and their subdivisions as money withdrawn
for taxation and in process of expenditure. Therefore, the total
amount of money at this time in demand deposits is $22,000,000,000,
producing an actual turnover at the rate of $630,000,000,000 per
annum, indicating that less than $11,000,000,000 is actively employed
at the normal rate of fifty times per annum.
When the money supplv contracts, the people invent credit methods
as a substitute for the shortage of money. Under this practice the
merchaiits and manufacturers sell their goods on a partial payment
plan. Finance companies are established to facilitate this substitute
for an adequate money supply. The installment plan has grown to
l^reat proportions because of this shortage of money. Tliis system
involves a risk and is very expensive upon customers who pay for
. what they get, with abnormal interest.
THE ORIGIN OP BUYING POWER
The origin of buying power is the income received by individuals
from wages, salaries, pensions, and investments of all sorts. Unless
those who are consumers receive enough income from these several
sources to enable them to buy thejr could not sell what they would be
itble to produce. Therefore, it is of importance in the national
economy to consider the income of consumers as vitally necessary to
maximum production.
When people are unemployed in large numbers it necessarily cuts
•down production, because their labor is not utilized in the production
of products and services. The problem is to achieve maximum em-
KAlriONAL WCGSOUt JOfD rOB ]IA|IKIK0 SY8X«K
M
plojrmeni at wages and faUries^Mffieiant to enaUa all tlie plonlttafil^
who are also consumers, to buy the things produced, otherwise piw^
tiion based upon Uie profit system oannot achteye tk wmadxmMei
abundance^' V ■ -■ ■;/^ ,- -^ ■.:-.:-:^-v/).-:-, .:\v:;t
In this bonnectidn, the following taMb shows the etaiMnficaUc^ el tli#
39,450,300 individuals who receiv^ incomeA for the fiscal yeat eiidil^
June 30, 1936:
Distribtdwn of natumal income
Distribution, by income groups
$1,000 a year or 1688.
$1,000 to $2,000 a year
$2,000 to $3,000 a year
$3,000 to $5,000 a year.. ...
$5,000 to $10,000 a year
$10,000 to $2fi,000 a year . . ,
$26,000 to fSO.OOO a year. . .
$AO,000 to $100,000 a year. .
Over $100,000 a year
Total
SUMMARY
$2,000 a year or less
$2,000 to $10,000 a year
Over $10,000 a year ,
Total
Di8trlbuti<m of
national income
Persons
Percent
46. M
35.28
11.34
4.60
1.51
.66
.13
.03
.01
100.00
81.82
17. $5
.83
100.00
R«oeived
inoonte
Percent
18.23
33.02
17.85
11.21
6.91
0.43
2.06
1.63
1.86
100.00
61.25
35.97
12.78
100.00
Distrlbtttion of tiKXWM
Indi-
viduals
18,368,04«
13,020,349
4,434,085
1.818,960
505,908
200,430
51,88?
13,041
5,887
89,496,300
32,270,208
6,848.262
330,740
39,468,300
Reoelved
$10,806,660,000
10,573,219,000
iO,576,6e7»000
6,64a,m0Q0
^092,336^000
8,810,611000
1,761,851,000
908, &5, 000
1,005,544,000
SO, 398, 638, 000
30,379.879.000
21, 313, 288, 000
7» 666, 493, 000
69,256,038,000
▼ftHiial
1,400
lis
3a>708
60^ OM
mm
MMJJ
8^ lit
33^877
1|M1.8»
Source: Consumer Incomes in the United States, compiled by the National Resources Conunittte.
Washington, D. C.
It should bo obvious that the amount of money required for food^
clothing, and shelter per individual could not be very high where
limited to the ordinary comforts and conveniences of a decent standard
of living.
The problem of maximum production so as to provide an abundanee
of the comforts and conveniences of a decent American standard of
living is the real problem. The above table shows that a high per*-
centage of the American people are in truth underfed, uiidercip<^ywi.
and undersheltered. The percentage of the pecyle who receiywt
more than is required for the highest standard of living, and 6veia
luxury, is very small. Those receiving less than $2,000 a jrear pet
individual amount to 81.82 percent of the persons receiving income*
and averaged only $941 per year, out of which the family must be
supported.
Individuals receiving over $10,000 a year represent only 0.81 percent
of the persons receiving incomes. Persons receiving over $100,000 a
year represent 0,01 percent, or 1 out of 10,000 workers, or 1 out of
about 30,000 people.
It should be obvious that the remedy for the disparity in inconie ii
not to be found merely ia super taxes on the highest incomes but* ixk
raising the incomes of the lower )t>r«Lcket8 througn the employment of
all the people and through raising the compensation of the worfcdr»
in the lower brackets by increased wages and salaries. It tliey are
employed to a maximum, the wealth which they would create would
be more than sufficient to raise the consumers buying power to a high
If^'nOlff All noon OMT iftim 7HBI BAMKINO ST8T&M
li|ilii|idof^^l^^ relyiiig upon punitivv flup«r Uxes on capital
The Anierican^capttaliiit s^vtem based on the profit motive
the great leaders in our economic life who produce throu|ii their genius
and mi^agement need not be denied the accumtilation of great wealth,
which of necessity passes on to ^e service of the race at the death of
the ambitious indiyidiial. The poUcy should not be to excessively
tax the great industrial leaders but to expand the income of those who
are engMwd in production in the lower brackets.
This oDJective can best be achieved through congressional control
of the volume of money and regulating the value of money so as to
give it the same purchasing, debt-paying power from one generation
to another.
Chapter XIV
THE PROBLEM OF UNEMPLOYMENT
The contraction of the money supply not only increases business
iailuree wad decreases individual and Government income but results,
in throwing millions of people out of employment compelling the
'Oovemment to resort to vanous measures of relief and the expendi-
ture of public funds on a colossal scale in order to protect the people
from actual starvation and physical deterioration.
The National Industrial Conference Board of New York, repre-
senting the leading industrial organizations of the United States, has
•collect information with regard to unemployment. We insert
their table showing the number of unemployed for the years 1929 to
date.
Unemployment figure* — Continued.
Annual average:
1934 10,623,000
1936 9,843,000
1936 - --. 8,169,000
1937 7,028,000
1938(June>) 10,981,000
Vnemployment figure*
Annual average:
1929 469,000
1930 3,849,000
1931 8,148,000
1932 12,616,000
1983._ 12,773,000
« FnttmliKury.
Bouro*: NatloiMl Indti«trl«l OonfamiM Board, Xn&
In estimating the need for an additional supply of money to prevent
tmemployment, these figures are of great significance, for they show
that unemployment expands as the money supply contracts. The
problem of unemployment is made worse by the fact that many who
are listed as employed are employed on short hours in a limited num-
ber of days instead of working a maximum number of normal days and
llOUTB.
These figures on unemployment should be compared with the price
level, representing the volume of money employed in the wholesale
markets. There should also be a comparison between the check
money actually employed in these years. Students will observe that
■as check monev went down and as the volimae of money went down
in the wholesale markets employment went down. A table showing
this comparison is here mserted for the years 1929 to June 1938:
nAjmmm W(3m<mt Amsi'mm mxsmm $mmm
Ymt
FriM
tev«l
OlwekmNiey
mmi
Ymt
Prtai
OtMdtnMMy
aunt
19S0
06.3
86.$
73.1
68.0
66.0
|1,800,OOQlOOO
ooo^ooaooo
000^060,000
460,000,000
480.000,000
468.000
8,840,000
8,148.000
13,616,000
is; 778, 000
IIM..^
74.6
78. 8
•&6
81.7
88.0
•jgjgojj
611«00Q^0Q»
6I7,9B0^8M>
*8i^O0^eOi
ISOO
t«t8.....
looi
imzis
SutS
1W2
1W3
im .....
i>»a«D«)..
i4SCS
1 Evtiinated for 1W8.
Source: Board of OoTemoiB of the Federal Reeerve System.
It is thus perfectly obvious that these figures demonstrate that aa
the money supply is contracted employment is contracted and as tha
money supply is increased employment increases.
The remedy, therefore, for unemplo3rment is to frankly recogniaa
the shortage of the money supply and to expand the money sup^
through the Federal Reserve banks by authority of the Qoyemment,
without penalizing those who ignorantly or innocently contract our
money supply.
THE UNBVBN DlflTRIBUTION OF MONBT
Naturally, in a great industrial nation where immense corpora*
tions are built up and financed in great financial centers, theore wouU
be a tendency to attract the accumulation of wealthand a laiger
supply of the money of the country to such centers because the profit
ansmg from factory production flows back to the centers where tkeia
con>orations have their central offices. . , ,
it results therefore in an uneven distribution of the money supply
and diminishes the purchasing power of those commimities from whom
the purchasing power is thus withdrawn by profits, interest, insur-
ance premiums, etc. The United States Government has, through
its departments and its various bureaus of research, ascertained m«
substantial facts in regard to this matter.
The profit of a corporation is an actual withdrawal from the ult|»
mate consumers of money held by the consumers, and such profii
leaves the domicile of the consumer and goes to the head office of tlM
manufacturing corporation. This profit means a transfer of local
demand deposits to the industrial center at the expense of the money
suppler of the consumers. Unless the farmers recdlve from consumeii
of agricultural products a profit sufficient to supply the local moiiei;f
needs, the buying power of the farmer is cut off to that extent, to ^<6
injury of the city factory, depriving it of a needed market for maehlni
production.
In 1920 agricultural products reached a high price because of tlMi
scarcity of agricultural products produced by the World War' aiid
the superabtmdance of money created by the Worid War thr0t^
bond issues. When the contraction of credit and curr^cy took I^^
in 1921, it removed the factor of money abundance while the scai^#
of agricultural products had been substantially corrected. Tml
resulted in the market price of agricultural products falling to less
than half of what they had been.
M
IIAVtOltAI^ OOQNCttfT AND 7HB BANKING BtWmU
In 1^2 the da^Mskni ol •gricisltuM} priote wm extremelv severe*
due to the contra^tipii of the moaey supply accompanied by an
libundanc0 of afipiculituiltl products.
Hie farmer always suffers in the selling price of his products more
than th^ manufacturers because the manufactiu«r can control the
price of his-o^m products and hold them in storage awaiting a fair
price and can regulate the voliune of his products. The manufac-
turers are highly organized and well financed. The farmers are not
organijfied, are not capable of being easily organized, are not well
financed and their products go upon the domestic market and upon*
the foreign market m keen competition with the products of the farm-
ers of the whole world.
Due to these causes the farmers always suffer more in a depression^
than other producers.
It is for the above reasons that the farmers shotdd be more deeply
interested in stabilizing the value of money through the regulation
by the Govemmeht of the volume of money.
The farmers of the country, who represent approximately 21 percent
of the labor of the country, have not been receiving 21 percent of the
national income, although it is notorious that the farmer must give
almost his entire time, from morning until night, in the cultivation of
his fields and in the conduct of animal industry. It is of interest to
note what the income of the agricultural classes has been in com-
parison with the national income. For that reason there is here
submitted a table showing the income of the farmers and stockmen,
48 compared with the income of the Nation for the years 1929 througli
1934.
The national income and the income of the farmers from 1929 to
1934, inclusive, were as follows:
HOW THE FARMERS HAVE SUFFERED
Ymt
National
inooma
ARricultural
income
Percent-
age
Year
National
income
Afn-icultural
income
Percent -
1M0....
M81
178,676,000.000
72,973,000,000
«t, 4^, 000, 000
16,167.000,000
4,695,000,000
4,271,000,000
7.8
0.3
6.9
1932
1933
1934
$47,964,000,000
44,431,000,000
49,440.000,000
$3,192,000,000
2,993,000.000
3,299,000,000
6.7
6.7
6.6
When the contraction of credit and currency took place in 1921 it had
the eflfect of depressing the price of farm commodities and the value of
farm lands and also making it more difficult for the farmers to meet
their debts in the form of mortgages.
The depression of 1921 reduced the market value of the lands of the
agricultural class $20,000,000,000. An index of the wholesale prices
of a few of the principal farm commodities is here submitted to show
♦!i<> manner in which all farm prices were affected by the contraction of
<jjredit and currency (see p. 36).
The extent to which tnose engaged in agriculture have been com-
pelled to mortgage the farms upon which they live is shown for the
various States m the following table:
NATIONAIi fiXX>MOMY Am» !I%Be BAKKIN0 StitllM
Bt»t«
MtelMlppl.....
Oklahoma
Alabwsa
Georgia
North Dakota..
Loaisiana
South DakoU.
Iowa
Nebraska
Arkansas
South Carolina.
Texas
Kansas
Colorado
Minnesota.— .\
Idaho
Illinois
Missouri
Wiseonsin
Montana
North Carolina
Wyoming
Indiana.
Tennessee
f9n» -
xttortgafed
Ml, 000
183,000
»2,000
199,000
60,000
135,000
64,000
166,000
99,000
186,000
121,000
377,000
119,000
40,000
125,000
27,000
141,000
169.000
119.000
W,000
176,000
10,000
111,000
147,000
PtreMit
mortfifad
89.7
80.4
78.9
78.2
78.3
77.6
77.4
77.8
77.2
77.0
76.7
76.1
71.9
67.9
67.8
67.1
66.2
66.1
65.9
64.6
63.2
62.5
61.4
60.2
State
CHr«goi|.^
Delairare..
Califoriiia
Wadiimtos
New Jersey
Vermont
Mkliigan
Utah.
Maryland
Massachusetts...
Ctmneetkut
Ohio
New York
Kentucky
Nevada
Florida
VlTflnla
Pennsylvania...
Rhode Island....
Arisona
New Uampablre
New Mexico
Maine
West Virginia...
mnrtfuiwl
^88
79,000
40^000
liOOO
14,000
96,000
16,000
28,000
18.000
9,000
1U.0Q0
83.006
126,000
1,000
96,000
76.000
76,000
1,000
6,000
6,000
12,000
16,000
96,000
nMrtfiiii
St
•f.r
«.§
»|
at
81:1
6t«
il.7
44.9
4Ct
4I,I
41.4
41.1
11.4
Ml4
U,l
m
In the above table was a very large number of terms of 3 acres or leas, whldi were not nkortgiited. Bx«i|tl
Tfor this fact the percentage of brger farms under mortgage would have been substantially moiar.
The total value of the brms in 1085 was about $32,000,000,000. The value In 1930 was t67,O0(MM^.
The estimated debt on these farms in 1934 was 19,600,000,000, and because oi foredosuras and o^ar iMwad
jtiansf^ to other purchasers of 1 4 billions, the <tebt remaining is about t8,000,000,000 for 1918.
Source: Hearings before the Committee on Agriculture and Forestry, U. 8. Senate, 76Ui Conf., on Fam
■Commodity Prices, June 7, 8, and 9, 1937.
As an evidence of the uneven distribution of bank deposits we
submit the following table, showini^ how much poorer some States
are than others in the way of an adequate money supply to carry on
their local business:
Check money, by States, October 19S4
states
Pwoent-
•geof
imured
deposits,
in num-
ber
Percent-
age of
insured
deposits,
in value
Dollars per
capita of
insured and
uninsured
demand
bank de-
posits
Alabama
99.3
98.6
09.0
97.9
98.7
96.4
97.4
98.7
98.9
99.1
98.8
98.4
99.1
99.1
99.1
99.1
98.9
98.9
98.6
97.9
98.8
98.8
99.0
96.7
69.7
59.
68.6
52.6
52.8
50.8
46.7
58.6
fiU.8
50.6
66.2
37.2
60.8
64.9
61.4
68.9
45.6
78.6
46.8
88.8
61.6
53.6
66.6
44.1
636.61
Aritona
46.71
Arkansas
38.39
California
133.41
Colorado
96.16
Connecticut
107.10
Delaware
300.08
District of Columbia
330.94
Florida
56.14
OeoTfda. -
30.88
Idaho -
46.14
Illinois
1S2.30
Indiana
86.83
Iowa...
69.48
Kwsas
70.60
Kentucky
17.00
Louisiana
M.63
Maine
8t.40
Maryland
90.98
Massachusetts
170. It
Michigan
01.00
Minnesota _
Mississippi....
79.00
31.10
Missouri.
138.33
D(rfla«»|i«l>
Oi^tlUof
Insured
bank de-
posits 0(
IMOOantf
wider
StetM
iioiitaiui
NAfMk*..^
N«ta4A *.
N«w Hamptblr*.
§*w Jertioy.
•V Mexico
•wYork
«fthCaroUiift..
North DftkofU...
loma.
Istond.-
b OarolliM.
oia..
Dftk
TtniMNMee
T«»i
VUh i.
VttllKHit
2r«toi»-.— -
waAlngtdii..
WwtVirgliiia
WlMiMitln
Wyontait.....
PiftMDt-
Imiired
depmits,
inDom'
bar
96.2
0«.8
S8.2
M.9
dS.7
99.0
97.3
99.0
99.2
96.9
90.0
90.0
S6
2
99.0
99.1
99.1
96.7
96.7
99.0
99.1
96.8
90.3
99.1
99.0
Piforat*
iBWFOd
d^Mwits,
invaltM
08,7
67.7
03.0
>d0.6
63.7
83.8
23.7
51. 1
78.7
66.1
U7.6
63.6
46.7
54.0
68.2
71.0
63.6
48.6
66.2
84.1
61.9
63.6
65.7
66.6
66.3
Dollars p«r
capita of
insttrcdand
ntiittsorad
d«mand
bankde*
posits
$64.64
82.46
83.64
64.95
92.65
31.36
406.60
28.76
31.33
71.68
69.60
66.65
134.20
112.30
21.66
43.06
42.14
81.27
65.03
48.94
65.99
67.30
47.80
66.97
60.67
DoUanpAT
capita of
instuad
bankd»-
posits of
15,000 and
und«r
$41.11
47.57
40.09
36.69
69.01
20.00
96.36
14.69
24.66
40.21
38.32
42,25
62.67
60.69
12.54
31.53
22.64
39.41
30.92
41. 15
34.04
36.00
31.40
36.71
41.43
t Bidad«i titans of 1 Stata bank membnr <rf Federal Reserve STstem.
flouroe: Hearings before the Committee ra Agriculture and Fofestry, U. S. Senate, 75th Cong., on farm
•Ottunodity prices, June 7, 8, 0, 1937.
, The total amount of insured demand bank deposits in small ac-
counts of $6,000 and under in December 1936 was only 5.6 billion
dollars. There were, roughly, 14.6 biUion dollars in large accounts
(insured only up to the first $6,000). The 14.6 billion dollars in large
accounts is held by only 2 percent of the bank deposits in number.
The other 98 percent in number must get along on only 5.5 billion
doUars to transact their business.
It must be remembered, however, that the great corporations repre-
sent a large number of stockholders, and that these corporations do
employ their uninsured demand deposits in transacting their own
business,
. Students will observe from these tables that there is an uneven
distribution of the money supply and that this accounts in sub-
stantial degree for the inability of some sections and classes to buy
freely of factory production, and therefore prevents maximum pro-
duction by the factories of the country.
If the Government, through Congress, was regulating the volume
of money, the new money annually required to meet the increase in
industrial production could be so distributed among underprivileged
dasses ana sections, where buying power is lacking, as to build up
gpTfidually a buying power that would be most beneficial to the ex-
pansion of our mdustrial production in the cities. It is now generally
recognized that the welfare of those who produce in the cities is inti-
mately bound up with the welfare of those who produce outside of
^6 cities; and that the success of the one is vital to the success of the
Other.
MOmBT IH BBLATTDlf TO DBBT v.tA
The indebtedBess of the people of the United Statee^ govemmentM»
corporate, and individualy is estimated varioualy at around $2fiOff
000,000^000. It ther^ore follows that the indebtedneee of the Qov-*
eminent, incurred during the World War when credits were expanded
and the dollar index went down to 60, has become a greats Durd^n
on the taxpayers, as this dollar has risen to its present piirchasing
power of 130. The same thing is true for the debts of aU the ot^tesi
counties, and cities. The same thing is true for the debts of corpora^
tions and individuals.
The most grievous burden which afflicts the economic life of the
people of the United States is this enormous burden of debt of the
people to each other. It paralyzes the Nation and prevents the full
expansion of economic Ufe.
The increased purchasing power of money is therefore an afflicUon
to people who have loans on their farms, or city property, or homes;
and upon all people and corporations who have borrowed money, on
bonds. It makes more dif&cult the payment of debt, and it has been
proven to be grossly unfair and ruinous to the debtors.
It has made it more difficult for the European nations to pay their
debts to the United States. They have been compelled to humiliate
themselves by advising the United States Government that thev were
not able to meet the indebtedness incurred during the World War, to
the great injury of the American people who had reUed with con-
fidence upon the payment of the European debts to the United States.
It has compelled the foreclosure of hundreds of thousands of mort*
gages.
It has bankrupted millions of people and contributed to the unem-
plovment of the Nation.
'the demand to restore the purchasing power of money back to
the 1926 price level has been lustified by the relation of money to debt>
because 1926 had a dollar wnose index of purchasing power was sub-
stantially the same as the average dollar jiidex of 1921-29, inclusive,
and also the same, approximately, as the average for the years^lO 14-30,
inclusive.
The relation of money to debt must be considered in establishing
justice between debtor and creditor. It is an error to think that the
creditor always profits at the expense of the debtor through the sale
of the debtor's property, for the bankruptcy of the debtor, the destruc-
tion of his earmng power, and the destruction of the value of the prop-
erty of the debtor often injures thecreditor in the most serious manner.
The interest of debtor and creditor alike will be served by restoring
the money supply to a normal, predepression basis and thereby
increasing the production and the iiicome of all the people.
THE INTEREST ON nBBT
Under the capitalist system all of the States of the Union, and the
United States as well, have passed laws legalizing rates of interest,
running from 6 to 10 percent.
These rates have been made greater on the debtor in many cases by
applying the rate discounts. They have been made greater of ten by
charging commissions, directly or indirectly, upon the borrower*
Ti^}^ to keep on
4epo^t a substantial pf^H of the loan ^^^
liieire ate othe^^ the disadyantage of the
borrower* This is one of the penalties which naturally now from
turning oyer to privately owned corporations and banks the crei^tion
of our money and a practical monopoly of our money supply ; and the
power of the banks to contract the money supply ana thereby increase
the burden on the debtor, whose income and whose property is
diniinished in value by the process of oontrar ting the volume of money.
We see the term * 'easy money" empl^ed. This term is employed
even by our liighest officials on the Federal Reserve Board. Wliat is
meant by * 'easy money" is merely the low rate of interest which is
charged in New York City and elsewhere by the banks in lending
money to the United States on the purchase of bonds and notes of
t^ United States by the banks, or from other borrowers whose credit
MS beyond question; it does not mean the average boiTOwer throughout
thie United States, who has borrowed money on the farm, for instance,
as a means of financing production on the farm, nor in the local
factory.
It is, therefore, of the greatest importance to observe a change
taking place throughout the world as one of the results of the depres-
sion^ and as one of the results of increasing intelligence with regard to
the importance of promoting production and employment by means of
money supplied at low interest rates.
In this connection attention is called to the fact that Great Britain
for over 6 years has been furnishing money for industry and commerce
at an unbroken rate of 2 percent per annum, while the normal rate
throughout the United States is probably three times this amount.
Attention is called to the present current rates in Europe. The
Federal Reserve Bulletin of November, 1938, page 1025, has a table
on money rates in^ foreign countries. The private discount rate in
Switzerland has been 1 percent since August 1937; in the Netherlands
it has been 0.14 percent; in Belgium it has been about 1.60 percent;
in France it has been 2% to 3 percent; and it has been 2.88 percent
in Germany.
Against these interest rates the United States must compete.
In Canada the Canadian Government has taken over the National
Bank of Canada and has authorized 2-percent loans to be made to the
municipalities of Canada by the national bank.
On page 998 of the November Federal Reserve Bulletin appears the
followmg rates in New York for the past year:
Prime commercial papeFhas been 1 percent and three-fourths to-4-
percent; prime bankers acceptances have been at seven-sixteenths
percent; stock exchange time loans have been 1% percent; stock ex-
change call loan renewals have been 1 percent; and United States
Treasury bills (short-term loans) had a rate of only 0.03 percent for
the week of October 22^ 1938.
These rates merely signify tliat the enormous accumulation of cash
capital unemployed is being loaned in this manner at an extremely low
rate. It does not mean tliat the ordinary man employed in agricul-
ture, in stock raising, or in local manufacturing can borrow money for
production and the carrying of inventories at these rates, or have anj
assurance that such lo^ns will be carried from year to year while he is
enea^ed in the processes of production. It is another evidence of the
maldistribution of money.
It pointB out that the fiiistabiU^ in ^^ m of the use of monaQr ii
one of the most seribt^ elemeiits iiid^ inetabflity of the maoiei^
tary system of the Uiiited States. It deo^nistrates the importance c^
the Opngrees of the United States reviewinj^ the wholci Question of the
laws fixing the rate^ of interest in the Umted Staiee ai^ oonmdenng
the question as to jQxing a rate which will make possible the ultimate
accomplishment of the a^Iition of debt and the payment of inteixast
by those who are engaged in producing the commoditiee and services
which are necessary to the enjoyment of life by the American people. «
LABOR AND MONET _ \
Without money, the compensation for labor and services would
necessarily be by barter. The labor of many people is comp^isated
by barter in very lai^e j^art, such as the labor on the farm wher^
shelter and food is furnished in exchange for labor. Millions pf
housewives and dependents in the household receive food and shelter
in exchange for domestic services. ^ ■./::]
The wages paid to labor by industrial enterprises are paid in very,
lai|:e part in money, and labor is organized in labor unions with ibp
right of collective bareaining as a means of securing a naprejust
compensation. These labor unions are organized into the American
Federation of Labor, the Committee on Industrial Organization, and
in other organizations. There are many farm organizations such as
the National Grange, the American Federation of Farm Bureaus, the
National Educational and Cooperative Union of Farmers> and the
National Cooperative Council (representing about 4,000 farm organi-
zations and 1,200,000 dues-paying members). Many other organiza-
tions exist having in view the protection of their members who labor*
In our industrial life those who manage the capital invested natu-
rally try to keep down the cost of the articles manufactured and;
therefore, often drive hard bargains with those who labor, making it
necessary for the Government to pass laws for collective bargainm^^
and other processes, through which labor may be better protected m
the matter of wages and salaries and safety m employment. Labor
suffers severely from booms and depressions, which result in millions
of men and women being suddenly thrown out of employment and
kept out of employment month after ^ month and year after year. In
1932 the unemployed rose to 14 miUions and wasabout llmilUonsin
1938. One million two hundred thousand adults are added annualljr
to the columns of those who are qualified for labor and who need em-
ployment.
It, therefore; is of supreme importance that the Congress of the
United States should have a wise monetary policy that would give
stabiUty to the volume of money employed in our industrial ufe^
and by which wages and salaries are paid, and by which those who
produce receive the money with which to buy, as consumers, the
products of the labor of others, The volume of this money must
constantly rise in order to supply an adequate volume to providiB a
medium of exchange for the products and services of 1, 200,000 adidto
annually entering the fields of labor. It is of importance not only to*
furnish an adequate supply of mbneV through the powers of Govern-'
ment but to prevent the indefensible expansion and contraction of
money which results in depression and unemployment. It is of impoi^
12333ft— 39 5
^ NATIONAL ECONOMY AND THE BANKING SYSTEM
tance to have stability of employment so that those who labor shall
receive a reasonable aimud livmg wage, and so that those who employ
labor may make contracts which will run, not day by day or week by
week or month by month, but from year to year with as little in-
stability as possible. —
The lack of stable, perm.anent employment com.pels laborers to
demand higher prices for their labor when their employment is for
comparatively short periods of time. This accounts for the complaint
often lodged against labor when the labor unions fix wages at a price
deemed too high. Such arbitrary high figures have a necessary
tendency to prevent the building of houses for the shelter of labor.
The national policy of Government should be directed to stabilizing
employment. Stability of employment depends upon stability in
the medium of exchange. There must be an adequate supply of
money, neither too little nor too much, and only the Government
with its financial power and legal authority can accomplish this end.
By brain or hv brawn, practically all of the people of the United
States labor and are producers and consumers. A man of wealth
directs the employment of his wealth, but as a consumer he draws no
more in food or clothing than millions who are not wealthy. The
accumulated wealth is distributed by law as the men of wealth die.
ABUNDANCE OR SCARCITY?
It is a grave fallacy to believe that scarcity is unavoidable or that
abundance for all is unattainable because scarcity afflicts millions of
Eeople in a land of unlimited natural opportunities. Many men
elieve and have been taught to believe by suffering that scarcity is
unavoidable; that there is a necessary limitation on the demand for
labor; that many must of necessity go unemployed; that, therefore,
the demand for employment should be distributed by a fewer number
of working days and by a shorter number of working hours. A fewer
number of working days and shorter hours will be justified when the
American people shall have fully developed and fully employ the
machines their inventive genius has developed, and the power pro-
duced through coal, petroleum, water power, and electricity. This
objective has not been achieved.
But until abundance for all is produced and full employment is
provided through an adequate supply of the medium of exchange,
the energy and intelligence of statesmen should be directed toward
furnishing an adequate medium of exchange for the transfer of
maximum products and services of the people to each other.
Labor leaders have had the artful appeal made to them that a rise
in the index of the price level means a rise in the cost of living. This
means this argument opposes a rise in the volume of the money re-
quired to create abundance and to create a larger volume of products.
This argument has been shown heretofore to be entirely fallacious
because as the money supply rises employment and wages increase .
and of course the products increase in volume as labor increases in
the number employed. When the volume of money and the volume
of commodities rise together, as they do, the purchasing power of
money remains unchanged and the average price of commodities re-
mains unchanged as far as money is concerned.
NATIONAL ECONOMY AND THE BANKING SYSTEM Q j
In Loeb's "Chart of plenty," which had its origm in the Department
of Commerce and the labor of a number of experts, it has been demon*
strated beyond the possibility of successful contradiction that with the
existing machinery, technological processes, manpower, organization,
increase of electrical energy, and our natural resources the people of
the United States could easily produce $130,000,000,000 annually, if
they were fully employed. This chart should be studied by patriotic
men who desire our country to reach the highest standard of hving for
all of the people. It should be studied by those who desire to end
human misery in the United States. It should be studied by those
who desire equality of opportunity for the children who are daily bom
into the world. It should be studied by those who desire the farmers
of the United States to have a fair reward for the hard labor they
perform. It should appeal to those who have been disturbed by the
growth of organizations based on discontent and which not only has
caused a widespread demand for the protection of the weak and de-
fenseless by the Federal Government, but has also caused trie growth
in this country of subversive organizations which regard democracy
as incapable of giving all of the people sufficient food to live on.
There was a great leader who proclaimed his purpose in entering
the world that He came to bring Ufe, and life more abundantly. He
told His disciples the first means by which to accompUsh it. As I
remember it. He said, "Seek ye fii-st the Kingdom of God and Hia
righteousness and all these things shall be addSl unto you."
National prosperity and abundance cannot be founded on blind
selfishness. It must be founded upon the doctrine which declared,
"Thou shalt love thy neighbor as thyself."
MONOPOLY AND MONEY
For many decades the people of the United States have been en-
deavoring by law to control tlie unfair exactions of monopolies in our
industrial life. The Sherman Antitrust law imposed severe penal-
ties for the restraint of trade by our powerful industrial organizations.
But in the test cases brought the Supreme Court held that Congress
only intended to forbid and penalize unreasonable restraints of trade.
This decision imposed upon the complainant the responsibility and
necessity of proving that the restraint complained of was unreasonable
and left the question of reasonableness to be determined by the judic-
iary. This made the law ineflective. Naturally, great and powerful
combinations, with enormous capital and great resources, can monop-
olize the supply of raw materials needed in mass production and can
obtain special advantages in many ways which makes successful
competition almost impossible.
Such monopolies can fix the price of their products so that when
depressions come and the doUai-s become very scarce, the products of
monopoly are more costly to the consumers in terms of their own
products, which are subjected to a severe lowering of price in the
markets due to money scarcity. This profoundly afflicts the farming
population of the country as well as the dwellers in the cities.
Recently in the beginning of 1937 We witnessed the price of copper
rise from 9 to 17 cents a pound because the supply of copper was con-
trolled by monopoly. In tliis manner the increase of such products in
Q2 NATIONAL ECONOMY AND THE3 BANKING SYSTEM
price arbitrarilv had the immediate effect of obstructing the natm'al
reaction from depression which otherwise was taking place.
No mere monetary poUcy can prevent the copper producing com-
panies from charging what they please. It is true that they operate
by pubUc charter, that they employ the public mails and trans-
portation system, and all the facilities for marketing provided by the
pubHc and the services of other citizens. It is also true that as yet
no pubUc control has been established to adequately control the
abuses of monopoly, or to establish a completely fair competitive
system. The correction of such practices and abuses lies outside of
the question of monetary science. Monetary science must confine
itself to the pubUc control of the volume of money and the regulation
of the value thereof. This duty has been imposed by the Constitu-
tion of the United States on the Congress of the United States.
, ONE HUNDRED PERCENT RESERVES
It has heretofore been pointed out that the power of the privately
owned banks, State and national, to expand the money supply by
loans and contract the money supply by liquidating the loans, or
requiring the loans paid has been the means of repeated boorns and
depressions in the United States,
In order to put an end to this destabilizing influence and power,
many economists now believe with Prof. Irving Fisher of Yale that
the national and State banks should be required to have 100 percent
reserves with the Federal Reserve banks against their demand bank
deposits. The effect of this would be:
1. The inability of the banks to cause booms and depressions by
the indefensible expansion and contraction of credit.
2. The absolute stability in the security of the demand bank
deposits all of which could be liquidated instantly on the demand of
the demand bank depositors. -
3. By this method the banks would have perfect security against
the possibility of any sudden demand.
4. The banks would still have the money arising from savings
accounts and tune deposits which they could invest, or could loan
for business purposes.
5. The banks would still have the right to obtain loans from the
Federal Reserve banks or sell to the Federal Reserve banks commercial
bills and real estate loans on long tmie.
6. The banks of course would have the earnings from handling
deposit accounts, both as to number and in the volume of such
accounts.
7. The banks v/ould have stability in tiie solvency of their borrow-
ers and stability in the value of their investments, and would auto-
matically cease to finance speculative operations on the security and
commodity exchanges under a properly ordered .system.
In addition to these advantages to the banks the United States
would have the advantage of acquiring througli the Reserve banks
the United States bonds, which the banks and public hold, by the
payment of these bonds when they fall due or are sold to the Reserve
oanks in credit of the Federal Reserve banks.^ Under this system the
Federal Reserve banks would gradually acquire the public debt, save
the interest on such bonds and the amortization charges, and there-
fore greatly facilitate the balancmg of the Budget.
NATIONAL BCONOMT AND TEm BA)IKINO 8X8nM 03
The 100-percent reserves required against the demand bank de-
posits would make it impossible for the banks to create an inflation
of the money supply of the United States with its destabilizing
influence. The banks at present have in cash and bonds a 100-percent
reserve against their demand deposits.
Chapter XV
THE CALL RATE ON THE SECURITY BXCHANQES
The call rate on the New York vStock Exchange was exempted by
statute of the State of New York from the rule forbidding an mterest
rate above a fixed rate in cases where the loans were $5,000 and up,
and secured by stock market collateral. Thus, generally, there was
no limitation on the rates of interest charged for call money.
One of the most potent causes of the instability of credit and
money was the uncontrolled call rate on the New York Stock Exchange,
In tlie fall of 1907 this rate went up to 100 percent. In the fall of
1919 it went up to 30 percent, after the Federal Reserve Board called
upon the banks in New York to liquidate their loans from the Federal
Reserve banks.
The effect of this high call rate was to create the general impression
throughout the country that money could not be obtained, even on
call where it could be liquidated m 1 day, except at a high rate.
Tliis naturally and necessarily disturbed the confidence of the whole
country in the stability of our credit structure.
The Brookings Institution published a work by Owens and Hardv
"Interest Rates and Stock speculation" on the effect of the call
money rate on deterring speculation, or encouraging reaction from
depression. Tliis work demonstrated, citing six major and minor
depressions, that a liigh rate of interest did not deter speculation on
the stock market and did not restore credit to normal during a
depression.
The effect of a 6 percent rediscount rate of interest imposed by
tlie Reserve banks in 1929 was to notify the businessmen of the
United States through the media of the banks, that the banks could
not obtain money from the Reserve banks and lend it to their cus-
tomers, except at a loss, because the banks were forbidden by law to
lend money at above 6 percent. It was estimated that it cost the
banks 1.3 percent on the average, for making and collecting loans.
vSo, unless they could charge at least 7.3 percent on their loans, they
would be losing money.
The attention of students is invited to the call rate on the New
York Stock Exchange for the years 1926 to 1937, inclusive.
Call rates on New York Stock Exchange
1926
1927
1928
1929
1930
1931 _
Source: Board of Oovprnoraof the Federal Reserve System.
^ercent
4. 50
1932
4.06
1933
6.04
1934
7.61
1935
2.93
1936
1.74
1937
Prrtent
. 2.06
. A. 16
. 1.00
„56
. .91
. 1.00
04 NATIONAL JBOONOMY AND THE} BANKING SYSTEM
While the average for 1929 was only 7.61 percent for the entire year,
the mte actually went up to 20 percent at critical periods during the
year, greatly destabilizing the credit structure of the United States and
creating the impression that even on the finest security, which could be
sold within 24 hours, the use of money was worth 20 percent per annum,
and that money under any conditions was extremely difficult to get.
The truth was, and is, that the United States and tlie Federal Reserve
banks have had the power at uny time to expand the money supply to
meet the necessities of the country by converting nonliquid securities
into money through purchase.
The effect of a high call rate on the New York Stock Exchange was
to invite money from every bank in the United States, because such
loans were abundantly protected by margin. They were easily made
through correspondent banks in New York City and they were profit-
able and safe. The result, however, of sucli loans was to expand
credit indefensibly, unjustifiably, and unwisely in the security excliange
and to make money scarce in the home l)ank, where prochiction and
local industry had to get their money. The eft'ect also was to inflate
the value of the securities being marketed by the great industrial cor-
porations between 1921 and 1929. The inflation of stock prices thus
created naturafly resulted in a crash in the stock market when the big
operators in stocks determined to sell their stocks and the public
finally discovered it.
It is an open secret that in July 1929 certain great houses jnarketed
their securities and loaned the money freely on call to less sagacious
operators who did not realize the threatened reaction which was in
sight to those who had greater vision.
Thus the high call rate, foflowed by the raising of the rediscount
rate by the Federal Reserve Board and tlio Federal Reserve banks,
contributed to the collapse which took i)hvce in 1929 and the vicious
downward spiral whieh followed.
When the collapse in the stock market took place and the violent
contraction of credit occurred, a wave of i)essiniisni swei)t the country.
Consumption diminished within less than 12 months by 25 i)ercent. *
The monthly Federal Reserve bulletins show all the figures as to
the expansion and cx)ntraction of the money su])])ly and economic
effects thereof. vStudents are referred to these bulletuis for oonfirnia-
tion and detail.
THK CONTUOL OP TIIK SKCUUITY RXCUANOKS
It was the recoguition of these truths which caused the Congress of
the United States to regulate the secin'ity exchanges by law, and to
put the Federal Reserve ])anks under more rigid control l)y the Federal
Reserve Board, in order to enable the Government to (leterniino the
marghis required in stock ()i)erations, to for])i(l member banks from
acting as agents in making loans on call for other banks, and to ixHjuiro
the strict sui)ervision of the security exchanges.
The old maxim "T^et the buyer beware" was modified by a new
rule, "Lot the seller also beware."
Tlie control of the security exchanges is tending to abate the
recurrence of stock-market booms and crashes, and to ])artly stabilize
the credit and business structure of the United States, but is by no
means sufiicicnt to give comi)lete stability.
NATIONAL ECONOMY AND THE BANKINO SYSTEM ^
Ohaptkb XVI
THB INFLATION BOOBY
It would be a grave error for students of modem monetary science
to ignore, or to overlook, the fact that the establishment of the
principles of modem monetary science is skillfully opposed by the
advocates of the old system under which we have suffered. We have
not all suffered. Some of our people have become enormously wealthy
xmder the old system, during which monopoly has flourished and
bull movements and bear movements have been caused in security
eJtchanges by skillful propaganda.
It would be unintelligent to ignore the fact that there are some
people who know how to make money on a large scale, through bull
markets and bear markets, and that this money is made not by creating
wealth, but by acquiring wealth under operations in the security
exchanges where the sagacious few know how to make money at the
expense of others. The general public, through propaganda, is
induced in bull markets to make the attempt to acquire wealth by
speculation without creating it by labor and services.
In denressions, which follow inflations, the sagacious few who have
acquired available credit can profit by buying property below its
normal value.
The old system is vigorously defended. Its advocates and defenders
fill the American press with articles dealing with the question of our
economic life in which they attribute the evils arising under the
existing system to many other causes than the real fundamental
cause. Modern monetary science exposes the real cause beyond the
})ossibilitv of doubt or successful contradiction. But the advocates
of the old order, minimize or denounce monetary causes as being
rcs))onsible for our national distress. The purport of these various
articles seems to be to warn the Members of the Senate and House of
Representatives and the people against "tinkering with the currency, ''
against "fiat" money, against "printing press money," and against
the dangers of "inflation." The experience of Gemiany following
the World War is pointed out as a terrifying example, in which
inflation resulted in the destruction of the value of bank deposits,
boiuis, insurance policies, mortgages, and other evidences of debt,
by reducing the German niark to zero value through the inflation
of the Gernian n)ark billions of times.
The term "inflation" has thus been built up as a bogey warning
the people against any necessary expansion by using the term as
equivalent to a defensible and necessary expansion of the money
supply.
These advocates of the old system (which has continuously repro-
duced one depression after another) seem to rely upon the lack of an
informed ])ublic opinion. They frighten the people by the bogey of
"inflation" as if the advocates of modern monetary science proposed
"inflation." Modern monetary science vigorously opposes "infla-
tion." It vigorously op|)osos the "inflation" which has been employed
by the sagacious few to profit and to acquire the wealth of the ignorant
many.
Modern monetary science proposes an adequate plan by which to
prevent inflation for all time.
05 NATIONAL BOONOHT AND THB BANKING 8TBTBM
Inflfttion is the indefensible expanoiou of credit and currency.
Inflation produces an unsound currency and destroys the uniform,
permanent, debt-paying purchasing i>ower of money, which is the
chief objective of modern monetary science.
Both of the great political parties in the United States have ex-
pressly promised in their national platforms and have demanded a
^*80und currency at all hazards."
Democratic national platform in 1932:
We maintain that the depression of 1020 and the depression of 1929 were due
to the indefensible contraction of credit for private profit at public ext)ense and
we pledge the Democratic Party to preserve a sound cutrency at all hazards.
The Democratic candidates pledge their endorsement of this platform 100 percent.
We promise to restore property values and to endeavor to establish a dollar of
uniform permanent debt-paying power.
Democratic national platform in 1936:
We approve the object of a permanent sound currency stabilized so as to
prevent the former' wide fluctuations in value, injuring in turn^-the producers,
debtors, and property owners, on the one hand, and wage earners and creditors,
on the other — a currency which will permit full utilization of the country's
resources.
Republican national platform, 1932:
We pledge a sound currency at all hazards. We will restore to the Congress
the authority lodged with it by the Constitution to coin all money and regulate
the value thereof.
RepubUcan platform for 1936:
We advocate a sound currency to be preserved at all hazards.
♦ * ♦ >i( « >•> f
We will restore to the Congress the authority lodged with it by the Constitu-
tion to coin money and regulate the value thereof ♦ ♦ ♦.
Progressive Party platform, 1938:
The ownership and control of money and credit, without qualification or
reservation, must be under public and not private control.
Farmer Labor Party platform, 1934:
Congress shall exercise the constitutional power to coin money and to regulate
the value thereof.
Modem monetary science proposes a plan to CvStablish this sound
currency. The only sound currency is a currency whose debt-paying,
purchasing power shall remain the same from one generation to
another. It is a currency which shall be equally fair to the creditor
and the debtor. It can only be obtained by the exercise of the con-
stitutional power of the Congress of the United States to regulate the
value of money by regulating the volume of money.
The advocates of the old system, which fed upon inflation and un-
sound money, have made many people believe that nobody under-
stands what makes the value of money. Modern monetary science
has demonstrated that this theory has no foundation of fact, but is a
part of the propaganda which has served to prevent the establishment
of the principles of modern monetary science, by which sound currency
can be established and through which the indefensible expansion and
contraction of credit shall be ended by Government power through a
legislative mandate of Congress. Modem monetary science proposes
a legislative mandate establishing a sound modern monetary policy
of government, by Congress, with the machinery necessary to make
it effective.
NATIONAL BOONOMY AND THB BANKING BXWFBM fff
ohaptbb xvn
THE CONSTITUTION OF THB UNITSJD STATES ON MONBT
One of the contributing causes of the Declaration of Independence
was the action of Great Britain in forbidding the Colonies to issue
momy and compelling the people to buy English money with their
products in order to have a legal medium of exchange.
Wlien the Colonies fought the Revolutionary War they emitted
colonial paper money not supported by adequate law. This money
ultimately proved to be worthless because not backed by the power
of taxation. Nevertheless, the money issued by the Colonies com-
prised a vital force to enable the Colonies to successfully carry on the
War of the Revolution.
When the Constitution of the United States was established the
members of the Constitutional Convention were perfectly well aware
of the importance of establishing the right to create money as a sover-
eign right of government. They, therefore, in the Constitution
forbade the States to create money and, broadly, through the powers
of the Constitution, gave the right to create money exclusively to
the Congress of the United States. And they gave explicit directions
to Congress in article I, section 8, paragraph 5 "* * * to coin
money and to regulate the value thereof * * *" {Legal Terider
cases).
The Government of the United States in the beginning was weak.
The Members of the Senate and House did not realize the ^at
powers given by the Constitution. The Congress contented itself
with passing an act declaring the dollar and its decimal parts to be
the monetary unit of account in the United States, and authorized
the coinage of gold and silver of a given weight and fineness as dollars.
Those who understood the power of a privatelv owned bank to
create money, and were familiar with the Bank of England and its
power of creating money, obtained a charter from the Congress to
ostablisli the Bank of the United States. But the bank fell into
- disfavor and renewal of its charter was denied. A second Bank of the
Unite(l States was established and the renewal of its charter denied
by the Congress.
Individual small banks grew up out of the need of the people for a
larger supply of money than was afforded by the currency issued by
the Congress of the United States These banks created money in
the form of demand bank deposits by loans and they also issued paper
money. But Congress during the CSvil War imposed a tax of 10 per-
cent annually upon this paper money issued by the privately owned
banks. In 1861, under Abraham Lincoln, Congress issued legal
tender paper money as a means of carrying on the Civil War. This
legal tender money was a means of saving the Union.
Lincoln thoroughly understood the constitutional right of Congress
to exclusively create money and to regulate the value thereof. An
abstract of liis views is given by McGeer in Conquest of Poverty.
Tlie views of Lincoln are of surpassing importance. McGeer's
abstract will be found in the appendix.
Tliis power was vigorously resisted by the privately owned banks,
and the opposition to President Lincoln were able, due to the stress
of the war, to put through a national banking system, by which a
gg NATIONAL ECONOMY AND THE BANKINQ SYSTEM
national bauk, privately owned, was authorized to issue paper cur-
rency secured by United States Government bonds. These banks
were put under the supervisory control of the Government.
These privately owned banks, and banks cluvrtered by the various
States, also privately owned, became the chief source by which money
was created in the United vStatos. These banks served the country
well, notwithstaiuUnj; periodic depressions due to an inherent weakness
in the system. This weakness was tlie uncontrolled power of the
banks and their borrowers to expand and contract the volume of
money, as heretofore described.
In 1913 the Federal Reserve System was established, which required
all member banks of the System to keep their principal reserves \vith
the district reserve bank, thus concentrating the reserves in a banking
systeni supervised by the Government through tlie Federal Reserve
Board.
Great powers .wore given to the Federal Reserve Board and to the
Federal Reserve banks.
The powers to expand credit were em])loycd thtougli these banks in
such a maimer as to fnuxnce the World War without serious difUculty.
Since that time, by amendments, the vSystem has been groatly
strengthened, giving tlie Board of Governors of the Federal Reserve
System the power to control tbe interest rate, to control the expansion
and contraction of credit, and to dominate the so-called Open Market
Committee.
All money has been nuide legal tender, gold has been removed from
our (lomestui circulation, and the Board of Governors have the power
to buy and to sell bonds through the Federal Reserve banks. The
Congress, notwithstanding these important improvements, has failed
to regulate the value of money as required by the specific terms of the
Constitution. The Congress has not passed any act instructing the
Board of Governors of the Federal Reserve System or the Federal
Reserve banks as to the duty of regulating the value of money, or
laying down any standard or plan by which it could be accomplished,
beyond imposing the duty of using the powers of the System to serve
the interests of commerce and industry.
President Wilson, like Lincoln, understood the constitutional power
of Congress to create and regulate the value of money. It was due
to him and to his administration that the Federal Reserve Act was
passed with this broad objective.
The Congress has given a great deal of attention to the problem.
When the Federal RcvScrve Act was under discussion, 3,000 pages of
testimony was taken from the leading fmanciers and businessmen of
America. In 1024, 1920, and 1032 special investigations were made
by the House of Representatives with regard-to regulating the value
01 money. On May 2, 1932, the House of Representatives passed
a bill wluch declared the monetary policy of the United vStates and the
means of its execution.
This act declared it to be the monetary policy of the United vStates
to restore and maintain the purchasing power of money as it had been
ascertained by the Department of Labor for the average of the years
1921-29. The act further required the vSecretary of the Treasury,
the py.deral^ Reserve Board, and the Federal Reserve banks to make
effective this policy.
NATIONAL ECONOMY AND THE BANKING SYSTEM QQ
It failed in the Senate, but the study of this question by the HotiM
has continued. There are at present pending in the Congress a
number of bills proposing to perfect the Federal Reserve Act which
contemplate a national monetary policy declared by Congress in
pursuance of the Constitution.
The present administration, under Franklin Delano Roosevelt, has
recognized the soundness of the views of Lincoln and Wilson and
(loclarod the great objectives of establishing a dollar whose debt-paying,
purchasing power should remain the same from one generation to
another, and to restore the predepression price level. These objec-
tives can only bo achieved by clearly recognizing the constitutional
power and duty of Congress to exclusively create and regulate the
value of money.
THE POWEHS OF THE UOARD OF GOVERNOH8 OP THE FEDERAL RESERVE
SYSTEM
The Federal Reserve Act, approved December 23, 1913, intended
to give to the Board of Governors (then the Federal Reserve Board,
the name was changed to the Board of Governors of the Federal
Reserve System in 1935) supervisory power over the member banks
of the System so as to control the ilow of credit, or the creation of
money in the form of denumd deposits by public and private loans
made by the banks, in such a manner as to serve the interests of indus-
try and commerce, and to prevent the indefensible expansion and
contraction of credit.
It was the intention of the act to prevent the indefensible expansion
and contraction of credit by the banks througli which booms and
depressions arose.
The powers to expand credit under the System were exemplified
during the World War when the Government expanded its loans to
the extent of $4(),q{)0,{){)0,()00 for the financing of the war, without
disturbing the credit structure of the banks.
The power to contract credit by the Board of Governors was set
forth-in a letter of the Governor of the Board, W. P. G. Harding, of
May 25, 1920, an abstract of whicli follows:
1. Discount rates should be raised.
2. Member banks should call loans on agricultural products, thus
forcing the sale of such products.
3. Member bank credits should bo restricted.
4. Existing loans should be liquidated.
5. Expansion of loans should bo checked.
6. That member banks should use their power to limit the volume
and character of loans.
7. The Federal Reserve banks should establish normal discount or
credit lines for each member bank and should impose graduated
discount rates on loans in excess of the normal line.
8. Served notice that tlie Federal Reserve banks have power to
refuse to discount any form or class of paper.
9. Suggested notice to the public that the Federal Reserve banks
have the power to control and regulate credit.
10. vServed notice to the piddic that they must economize, must
limit demands for banking credit, and must begin to pay existing
debts.
70 NATIONAL ECONOMY AND THE BANKING SYSTEM
U. Suggested that the member banks educate and impress the
public with notice of the Federal Reserve's announced policy. (These
11 points are taken from S. Rept. No. 1328, 75th Cong.)
The present powers of the Board were briefly stated by the chair-
man of the Board, Hon. Marriner Eccles, as follows:
The primary function of the Federal Reserve System is to influence the flow of
money and to contribute to the soundness of the banking situation.
* 4< f * ♦ ♦ *
Complete authority over all matters of major national policy, such as the deter-
mination of discount rates, reserve requirements, margin requirements on security
loans, and maximum rates of interest to be paid on time deposits, is vested in the
Board of Governors. Authority over open-market operations is vested in an
open-market committee, consisting of the seven members of the Board of Gover-
nors and five members elected by the Reserve banks.
4( 1(1 i4i * >•< >t< 4i
The banks can create and destroy money. Bank credit is money. It is
the money we do most of our business with, not with that currency which we
usually think of as rhoney.
The Board of Governors and the Reserve banks have the power to
extend credits to the member banks, to furnish them with currency,
and by their influence can cause the member banks to contract or ex-
pand credit.
The Federal Reserve Act as amended, however, had, up to the
close of the Seventy-fifth Congress, failed to give a specific legislative
mandate establishing a national monetary policy providing for the
creation of money adequate to conveniently serve as a medium of
exchange in transferring the products and services of the people to
and from each other, or to achieve maximum employment and maxi-
mum industrial production.
These latter objectives were submitted to the Seventy-fifth Congress
by various bills, such as H. R. 7230 (the Patman bill), H. R. 9800
(the Binderup bill), S. 3800 (the Ijogan bill), and others.
One of the powers of the Federal Reserve Board in the creation
of money is the power to buy bonds and bankable assets through a
committee called the open-market committee. This committee
consists of seven members of the Board and five members chosen by
the Reserve banks. The bills pending in Congress propose to remove
private persons from the open-market committee on the ground that
the question of controlling the expansion of money should be exclu-
sively in the hands of the Board of Governors.
These bills also propose to discontinue the so-called Federal Reserve
Advisory Council, consisting of one member from each Federal
Reserve bank, and having the power to advise the Board on the
exercise of its powers, for the same reason.
Chapter XVIII
THE IMPORTANCK OF A NATIONAL MONETARY POLICY
In order to carry out the constitutional duty of Congress to regu-
late the value of money, it is absolutely essential that Congress should
declare by legislative mandate the policy of the Government, as follows:
That Congress shall by law exclusively create money and regulate
the value thereof; that Congress does, by statute, set forth the manner
in which the expansion and contraction of bank credit should be accom-
plished; that Congress shall, by statute, establish the Board of Gov-
NATIONAL BOONOMY AND THB BAN|CINO BTSTBll 7I
emora of the Federal Reserve System ^ or some monetary authn^ta^,
and charge them with the duty of usmg the Keserye banks for w»
expansion and contraction of the supply of money; that Gongreas
shall retain adequate control over its monetary agents; that the
Reserve banks shall be reauired to function as they were onginally
intended to function, as banks estabHshed in the interest of Uie
public creation and regulation of the value of money and for the
accommodation of industry and commerce.
In the original act, introduced in the Senate on June 26, 1913, by
the chairman of the Committee on Banking and Currency, there was
.an express provision that the powers of the System should be em«
ployed "to promote a stable price level." The language "to promote
a stable price level" meant precisely the same as if it had been written
"to promote a stable dollar of uniform, debt-paying, purchasing
power."
This language was stricken from the bill, leaving no specific legis-
lative mandate in the bill requiiing the Federal Reserve Board of
Governors, or the Federal Reserve banks, to pursue a policy by which
to regulate the value of money or "to promote a stable price level."
The omission of this language led to the unhappy results which
produced the panic of 1921 and contributed to the more serious
catastrophe of 1929-32. It, therefore, is now of supreme importance
for Congress to declare a national monetary policy wliich shall be
specific and shall give the Congress an agency through which it may
be accomplished.
If a monetary policy clearly defining the above objective was
merely declared by the Cliief Executive, or by the Secretary of the
Treasury, or ))y the Board of Governors of the Federal Reserve Sys-
tem, it would not be enough, since a change in the Presidency, or in
the Secretary of the Treasury, or in the Board of Governors of the
Federal Reserve System would subject the policy to change and would
not be so dependable as an act of Congress. Not only might the
executive ofFicers of the Government be entirely changed m personnel,
but they might change their opimons under the influences which
heretofore have been so powerful a factor in the conduct of these offices.
What the country needs is that those who are engaged in production,
transportation, and distribution should be enabled to make their con-
tracts with dependable security upon a fixed policy of the Government
having the greatest pos.sible stabihty.
It is in vain to expect a law to bo effective if it is not administered
by those who understand it and are in sympathy with it. For that
reason, it is of the greatest importance that the members of the
Board of Governors of the Federal Reserve System, the Secretary
of the Treasury, and those in charge of the 12 Federal Reserve bants
should thoroughly understand the monetary policy and have an- intel-
ligent comprehension as to the manner in which it may be carried
out. It is of importance that they should not be, by virtue of their
previous environment and training, at heart opposed to the creation
and regulation of the value of money by the Government. As a
condition of their service, proof of their fitness should be required and
an adequate means shoukl be provided for their removal from office,
witliout stigma and without technical difficulties^ in the event that
the Congress has its confidence in their efficiency impaired.
72 NATIONAL ECONOMY AND THE BANKING SYSTEM
_ That these principles are well understood in Congress will appear
from the language of bills that are now pending in Congress, such as
the Binderup bill (H. R. 9800); in the proposed amendments to the
Patman bill (H. R. 7230); and in the bill introduced by Senator M. M.
Logan of Kentucky, former attorney general and chief justice of the
State Supreme Court of Kentucky. The language of part of the
Logan bill (S. 3800) is as follows:
The Board of Governors of the Federal Reserve System is hereby declared to
be the agency of the Cpngress to create money and regulate the value thereof, as
authorized by the Constitution of the United States; and tlie individual members
of auch Board shall hold office subject to the will of the Congress of the United
States; and cither the Senate or the House b}' resolution may authorize and
request the President of the United States to nominate a successor to a member
of the Board from any Federal Reserve district regardless of the term for which
he was appointed, whereupon, the office of such member ujjon the passage of such
resolution shall be vacated.
The Binderup bill and amendments to the Patnuui bill have lan-
guage of similar ptirport.
The Patman bill, endorsed by IGO Congressmen, also required the
Treasury to purchase the stock in the Federal Reserve banks. The
Binderup bill also proposed the purchase of the stock.
The testimony taken on the Patman ])ill contained all the evidence
necessaiy~to justify these principles of tlie Patman and the Binderup
bills.
The Binderup bill makes the State banks subject to the same condi-
tions as the member banks of the Fechiral Re>:erve System, which is
obviously a necessary principle to make the Svstem uniform.
The importance of a legislative mandate that cannot be overlooked,
avoided, or defeated has l)eon already sufliciently illustrated by the
administration of the Federal Ke^cJ-ve Act since 1919. It should be
perfectly obvious that tiic numdate in the act that the ])o\vers of the
System sliould be employed to acconunodate commerce and industry
has-l)een entirely ignoied by the Federal Reserve Board, and the
Board of Governors of the Federal Resei've System, for they have
pursued policies i-esultin^ in and permitting the absolute destruction
of both commerce and mdustry in the past, as ])ointed out in the
evidence taken on the Patman bill in the testimony of the author of
this book, as well as by the testimony of others.
Another provision of value is that the currency of the country should
consist of one foj'm of legal-tender paper money in order to prevent
the public being confused by the various kinds of pa})er money which
have been i)ermitted to j)rcvail in the past. For instance, we have
had not only the original greenbacks of Piesident Jjincoln, but the
so-called Trcas\iry notes of 1890, and thousands of different kinds of
National bank notes, Federal Reserve notes, Federal lieserve bank
notes, silver certificates, etc. Simplicity, economy, keei)ing of
records, and management woidd be simplified by one form of legal-
tender paper money.
A desirable bill sho\dd also j)rovide a method by which the entire
powers of the System should he made available for the protection
of the individmd bank against any untoward incidents that might
happen to it, and all banks should be made subject to the same
conditions as far as their reserves are concerned. Such a bill should
provide for one form of examination, without cost to the banks, as a
part of the expense of the vSystem in stabilizing the banking structure.
NATIONAL ECONOMY AND THE BANKING SYSTEM 73
The distribution of new money reauired annually to keep up with
the increase of the index of industrial production should be provided
through the Social Sec\irity organization. A propostd to this end will
be found in <he Binderup bill.
In considering such a bill the Congress should make a thorough
review of the question of legalized interest rates by the member banks
with a view to giving the American businessmen a rate of interest at
least as low as that enjoyed by the businessmen of nations engaged in
competitive commerce (see eh. XIV).
In regulating the flow of money to meet the expansion of industrial
production and the increase of population, it must be remembered-
that there is at present a very large volume of demand bank deposits
whicli_are held by the depositors as corporate reserves, or as reserves
for investments by individuals. These funds may become active
again when a fixed policy of Government is established.
To prevent such funds expanding the medium of exchange beyond
the point necessary to restore the predepresslon price level, the Gov-
ernment must be prepared to contract the money supply when neces-
sary. This can be done by reselling the bonds and bankable assets
previously bought. It must be remembered, however, that to achieve
maximum production would readily absorb a large part of these
reserves when they are restored to active use as a circulating medium, •
and or that reason this potential expansion is entirely within the
control of the Govennnent.
Chapteu XIX
THE NECESSITY FOR GOVERNMENT MANAGEMENT AND STABILIZATION
OF MONEY
It should be obvious from the terrifying panics from which this
country has repeatedly sulFered, especially those of the last 30 years
(1907, '1921, 1929-32, and 1937) that the whole system of creating
and contracting money has been uncontrolled and exceedingly in-
jurious to the people of the United States.
The Congress alone has the legal authority and the legislative and
financial power to regulate the value of money. The Constitution
broadly gave the Congress the exclusive power to create money.
The Constitution specifically directed Congress to regulate the value
of money. This direction of the Constitution requiring Congress to
regulate tlTe value of money is a constitutional mandate which re-
quires intelligent obedience by those who take the oath of office to
support the Constitution.
When the panic of 1921 occurred, we had 30,000 banks. Over
16,000 of these banks have since been compelled to go out of business
because of the impairment of the solvency of their borrowers and the
destruction of the value of their loans and investments.
While the banks have been of groat use to the people of the United
States in the creation of money and in the numagement of the banking
business, their inability to cooperate with each other — even if they
had the constitutional right to create money — justifies and makes
necessary the regulation of the value of money by the Congress, where
such duty is by law imposed.
74 NATIONAL ECONOMY AND THE BANKING SYSTEM
When the Congress shall declare a national monetary policy which
shall give the Nation a dollar whose debt-paying, purchasing power
shall remain the same from one generation to another, the people of
the United States, for the first time in their history, will have an honest
dollar.
The onlv honest dollar is a dollar of stable, debt-paying, purchasing
power. The only honest dollar is a dollar which repays the creditor
the value he lent and no more, and requires the debtor to pay the
value he borrowed and no more.
The people of the United States are entitled to a sound currency.
The only sound currency is a currency .whose exchange value is the
same from one generation to another. The failure of the Govern-
ment to create and stabilize the value of money has not onlv resulted
in the unemployment of millions of people through no fault of their
own, but it has seriously changed the relationship between debtors
and creditors, affecting contracts of over $200,000,000,000, repre-
senting the public and private debts of the country. It has mate-
rially changed the market price and exchange value, not only of money,
but of all commodities and services measured by money. It has
changed the exchange value of securities on the most colossal scale.
It has changed the value of real estate, buildings, and equities of all
kinds. It has rendered human labor unstable when the greatest need
of the Nation is complete stability in the employment of all the
people, with an annual living wage for the least of them.
The desirability of governmental control is demonstrated by the
fact that the control of the value of money requires the control of the
volume of money. The control of the volume of money by expansion
immediately produces an increased industrial production, employment,
wages, and corporate, individual, and governmental incomes. The
regulation of the volume of money by the Goveniment, with the intel-
ligent purpose of giving money a stable purchasing power, will not
only benefit the day laborer, who is entitled to an annual living wage,
but it will benefit all workers in field, factory, and mine, and in the
offices of the various businessmen of America.
When the national industrial production is doubled it will result in
many important benefits. It will enable taxes to be greatly reduced
in percentages because the income of the country will be twice as
much as it is now and would justify the rate of taxation being cut to
one-half. It would put an end to public relief and charity for the
unemployed, in large measure. Since to expand the volume of credit
and currency should be accomplished by the purchase of Government
bonds, it would have the effect of cutting down the interest and amor-
tization charges on Government bonds, thereby reducing the demand
on the Budget by approximately $1,000,000,000 a year.
The elimination of the work for public relief and the interest and
amortization of the bonds would make an annual saving at present of
approximately $4,000,000,000.
Moreover, when the Government regulates the value of money on a
basis of stability, it would be justified in creating approximately
$2,000,000,000 annually of new money, in the form of demand deposits,
to be distributed where it is most needed under^the Social Security Act.
The regulation of the value of money by creating money through the
Government authority, and for the benefit of all the people, would
NATIONAt ECONOMY AND THE BANKING STSTBM 75
result a« it has in Great Britain, which in 5 years has increased its
industrial production 60 percent and given to the country a rate of
interest for 6 years at 2 percent per annum without a break. When the
Government of the United States seriously undertakes the problem
of creating the money the people require for maximum industrial
production, it will abolish poverty in tne United States by creating a
demand for labor at an annual living wage that will give a satisfactory
standard of living to all the people.
The treasure house of natural resources of the United States, the
enormous power which now goes to waste from streams which could
produce many times the amoimt of power the people now enjoy, is
evidence that there is no limit to what the people can create and enjoy.
The United States has suffered excruciatingly from underconsump-
tion because of the stringency of the supply of a medium of exchange,
by which alone the people can exchange their products and services
adequately with each other.
The experience of the last 31 years of four serious panics and
depressions is proof positive that the banks cannot control the volume
of money, aird that their failure to do so has not only destroyed
thousands of banks, but has inflicted the people with great suffering.
The Government alone can give relief. The Government alone
has the legal authority and duty to establish and regulate the value
of money, and to create it in sufficient quantity to serve the national
use. It alone has the power and tlie duty to prevent either injurious
expansion or destructive contraction.
The creation of the money required by the people to achieve maxi-
mum industrial production is now provided for by the Federal Reserve
Act, as amended. Some additional amendments are necessary and
desirable. The Federal Reserve banks, are, in effect, public banks
under tlie supervisory control of the Congress of the United States,
which has delegated the supervision of these banks to the Board of
Governors of the Federal Reserve System. Under the present statute,
the money which is now required to restore maximum employment
can be obtained by the Reserve banks buying Goverimient bonds and
other bankable assets to the extent required. When maximum-
employment and industrial production is accomplished, the Govern-
ment can prevent any excessive expansion of credit, and can reduce
any excessive expansion of credit by the simple process of selling the
bonds and bankable assets previously bouglit by the Federal Reserve
banks.
Since the country requires ap])roximately $2,000,000,000 annually
of increased money to meet the natural expansion of i)rodiiction, this
increase can be created by giving the United States credit with the
Reserve banks and spending such money under the Social Security
Act for the benefit of people who are disabled by age, sickness, or
other incompetency.
It is well known that the sup])ly of money in the United vStates is
most unevenly distributed among the citizens and among the States
as well. Therefore, in creating new money, provision should be made
for the anniuil distribution of a portion of it among the consumers
who otherwise may not be able to buy.
rj:?.'$MM 30 (5
76 NATIONAL ECONOMY AND THK BANKING SYSTKM
Chapter XX
THE EFFECTS* OF BTABLE MONEY
ON THE BANKS
Tho bankers of the United States, in spite of the weakness of tlu^
banking system, liave been of great service in creating credit for
legitiinate production. ^ They have siifiored greatly because of tho
instability of the credit structure. Over 16, 000 banks have faikul
because of the imi)ainnent of the solvency of their borrower and
of tlie security which they had taken from their borrowers. No
class will be more greatly benefited by the stabilizing of money
through a sound national monetary ])olicy than the bankers. Tliey
will be completely protected, not only by the insurance of their
deposits, but by tlie insurance of stability in business and a steady
rising in the national production and income.
Under the new system the bankers coidd earn as good or a better
income on tlieir ca])ital and services than they have heretofore done.
At the last knov;n estimate of the Federal Deposit Insurance Cor-
poration there were about 50,000,000 deposits in the banks of the
United States, If these dey)osits ])aid a dollar a month on an average,
depending on the si/,e~oT the deposit and the activity of the deposit,
it would ])ro(hice an income of approximately $000,000,000. These
deposits sliouid doid)le under the new system. If the bankers received
l)ayment for the volume of checks, on which they guarantee the signa-
ture of the maker and of the payee, at the rate of a dollar a thousand
it would net them, on the volume of checks debited in 1920, for
exarn])le, $845,000,000 a year. They woidd have the right to charge
for other services to clients. Besides these revenues the banl^s W(>uld
have the o])])ortimity of lending or investing the money re])resented
by savings accounts and time deposits which should, under these cir-
cunistances, greatly increase. They could also lend their capital
and surplus with impunity.
Moreover, the banks coidd make long-time loans with dependable
security on real estate, homes, apartment, and business buildings.
They would have the additional advautage of stability in the value
of their bonds and mortgages. Their own in vestmeiUs- would increase
in value.
vSo, even if tho United States should, as a part of its monetary
policy, exercise its right to exclusively create money, the banks would
be benefited by such a system.
Under the new conditions of Government creation of the money
required for the transaction of the business of the country, there should
be an increase in industrial production and consumption, such as has
taken place in Great Britain where the Government and banks are
pursuing tlxe policy of managed money.
The volume of deposits and tho business of the banks should go
through an expansion corresponding with the expansion of industrial
production. —
Under the new system, governed by tho principles of modern mon-
etary science, the banks would receive complete protection from tho
Government against the terrifying evils of luture depressions. Thus
the solvency of borrowers and the value of the investments of the
banks would be given a stability which they have not enjoyed in tho
past.
NATIONAL ECONOMY AND THE BANKJNO SYSTEM 77
ON MANUFACTURERS
Stable money, with stability in business, and a steadily rising vol-
ume of production, manufacturers would enjoy an increasing pros-
])erity witliout fear of collapse from depression, and could, therefore,
forecast their future and get the benefit of the savings due to maximum
employment of their existing machinery and facilities, with otlier
economies due to stability of production. They could afford to make
their contracts with labor on the basis of an annual living wage, with
benefits both to the manufacturer and the laborer.
They woidd bo assured of a stable consuming power and a steadily
iilcreasing demand. Their sources of supply of raw material would be
stabihzed and made more dependable. They would be benefited by
the lowering of the interest rate on credits required in tlie transaction
of their business. They would be able to obtain credits to an extent
on goods in process of manufacture and distribution which they do
not at present enjoy.
The wliolesaler's accounts payable, which are his income from the
merchants and the collection of which enables him to pay the manu-
facturer, would be stabilized, and establish tlioreby a volume of de-
pendable credit not now available under the operation of the Federal
Reserve S^^stem.
ON MERCHANTS
The stabilization and the steady expansion of business under stable
money would be of service to the wholesale merchants and retail
mercliants, and would enable the retail merchants to employ the
credits they extent to customers to be used as a basis of bank credit,
if they need it in the transaction of their business.
ON CONTRACTORS
Contractors could make their contracts for the future with depend-
abk> security, knowing that the dollar would not sufl'er any substantial
change in debt-i)aying, purchasing power. Contracts could thus be
made for buildings and structures running over longer periods of time
without danger to the contractors or to those who em})loy the
contractors.
ON CORPORATE AND INDIVIDUAL INCOMES
Under conditions of stability in the purchasing power of money
and in business, the incomes of the 400,000 corporations in the United
States would be steadily increasing or made more stable. , Their divi-
dends would be nuide more dependable. Individual incomes would be
increased, not only through the payment of dividends by the corpora-
tions, but by the earning power of individuals under these more
favorable conditions.
There are over 500 distinct avocations in the professional and
business world that would be interested in the stabilization of business
conditions in the United vStates. There are two and one-half times as
many people, adidts earning their livelihood by social services, as
there are people employed in the factories.
78 NATIONAL ECONOMY AND THE BANKING SYSTEM
ON AOKICULTORB
The record proves clearly that those who are engaged in agriculture
and animal industry suffer more severely than any other class of people
from depression.
When all of the people are employed and maximum industrial pro-
duction is achieved, the people of the cities, towns, and villages will
have the means through their wages, salaries, and dividends of buying
an increased volume of the products of agriculture and animal in-
dustry. This increased consumption will increase the market for
siich products and enable the farmers to receive a return commensurate
with the products of the farms.
The income of agriculture and animal industry will thus be stabilized
and the farmers will receive an adequate return for their labor, with a
reasonable profit on the capital which thej^ employ. It should result
in individual ownership of farms, the liquidation of their mortgages,
the end of tenaiit farming, and the establishment of liberty-loving
people in dependable homes in every State in the Union.
ON WAGE EARNERS
Under stable conditions of business, increased production and
consumption, and imder conditions which will afford a good market
for the employment of the labor ot wage earners and those who receive
salaries, these classes will be able to receive a reasonable annual living
wage and reasonable salary.
ON TEACHERS
It is notorious that in some parts of the United States those who
teach the youth of America are not paid a reasonable annual living
wage. Under conditions where the Government of the United States
creates the money required to stabilize business, the uneven distribu-
tion of money, employed in consumption and production, can be so
modified as gradually to substantially increase the income of the
pnderpaid teachers.
It should be remembered that tlie income of the States, counties,
and cities is profoundly affected by the money supply in the various
States and that, therefore, »State employees and social workers, and
even ministers of the gospel, are deeply affected by the wealth or
poverty of the vState in which they live.
ON GOVERNMENTAL INCOME
The income of the United States Government is derived directly
from taxes which are imposed on the people. These taxes are neces-
sarily hmited by the capacitv of the people to pay. Therefore, in
States, counties, and cities where there is an unequal distribution of
money^ the Governments are themselves limited in paying employees.
Dunng the depression of 1932, the United States Government
income fell to less than one-half of what it was before. But under
conditions of stability, when industrial production can be increased to
twice what it is at present, the Government income would be expanded
correspondingly, and with the cutting off of the expense of public
relief, of interest and amortization on the public debt (proposed by
the new system), the_- taxes on all classes of people could be greatly
NATIONAL ECONOMY AND THE BANKING SYSTEM 79
reduced and the services of the Goverament, the States, counties^
and cities could be employed in the matter of protection, education,
health services, and other public facilities.
ON THE CREDITOR GLASS
Under stabilized conditions, where the national industrial produc-
tion is increased or doubled, the creditor class would be benefited by
the assurance of the ability of the debtor to meet his obligations.
Therefore, the investments of the creditor class would be increased in
the matter of stability and certainty of payment of interest and
principal.
ON THE SUBMERGED THIRD
The effect of the new system would be to put an end to unwilline
unemployment and to furnish the opportunity to all who are able and
willing to work to make a reasonable living by their own efforts, and
put an end to the tragic conditions where one-third of the people are
underfed, underclothed, and undersheltered and compelled to rely
upon public or private relief to avoid starvation and destructive
exposure of health.
ON THE WEALTHY CLASS
The 2 percent of the people who might be classified as very wealthy
would have the advantage of stability in their incomes and a very
substantial lowering of taxes, for the simple reason that higher
taxes would be unnecessary. The danger to the disturbance of the
social order by a growing class of imemployed and unhappy people
would cease. The crime which is engendered by extreme poverty and
suffering and which often threatens the rich and their property would
be abated and would probably almost entirely cease to exist. The
growth of political organizations seeking violent remedies for the
existing distress of the country would cease, and the danger from
such sources would be ended by a better understanding and better
conditions of life. The real estate and securities of the wealthy class
would increase in value. —
One of the objectives of modern monetary science is not to take
from those who have and give to those who have not, but to create
conditions under which those who have not shall be able to create
for themselves the things which they need for the comforts and con-
veniences of life, and the opportunity to enjoy the products and serv-
ices which they themselves create. The great objective is to facilitate
the creation of abundant wealth for all the people to enjoy.
Chapter XXI
THE CAPITALIST SYSTEM
The capitalist system is based upon the sound theory that those
who create wealth by labor, TiTventive genius, organization, and thrift
should beentitled to enjoy fully the proceeds of their labor, sacrifice,
and talents.
This theory is based upon merit and reason, and yet it is also true
that the capital acquired in this way is the offspring and directly
derived from labor itself and that labor, which creates capital should
gQ NATIONAL ECONOMY AND THR BANKING SYSTEM
not bo oppressed and exploited, or reduced to severe poverty by the
processes of organized capital; which is itself the offspring of labor.
It has been the failure to recognize this truth which has resulted in
the enormous disturbances of the world. When the capitalist system
in Russia, under and because of the Romanofrs, had rendered life
unendurable to those who labored \n the fields and factories, it resulted
in the violent revolution of liCnin and the complete overthrow of the
capitalist system, for the time beimr, throughout l^u^'sia, involving
nearly 1(]5,000,000 peo[)le. This policy has been extended to some
extent into China.
In our own country conununism has been advo ated by grou{)s of
peo{)lo who see no better remedy.
Modern monetary science points out with |)reci;-ion a method by
which the benefits of intelligent ca|)italism can be conserved, jnid at
the same tinu? abate the harm which comes from an imperfect system
that permits ex(;essive abuses of monopoly that luive resulted from
an imperfect credit and banking structure in the I'uited States.
It is unwise and unjust to broadly indict the nu)tives of other i)e()ple
that may arise from self-interest and which j)robably ar(> without any
ininucal or imjust j)urpose toward others.
Under the knowledge acquired in recent years, mod(M*n moiu»tary
science can now clearly i)oint the way to a means of doubling the
national production of wealth by ci-eating enough nu)ncy to give food,
clothing, permaJient family hom(»s, the comforts and conveniences,
and even the luxuries of lif(», to all of the j)eoi)le who are willing to
do their full part in the creation and (listril)ution of the wealth created.
Modern monetary science ])oints the way by which the (lovermnent,
representing all of the people, shall prevent either inflation (which is
the indefensible expansion of credit or money) or the corresponding
undue and indefensible contraction of credit through which the j)eople
have suffered.
Modern monetary science proposes a plan which the Sui)reme C .oui't
of the United vStates has justified in its o|)ir)i()n in the Le(/(il Tender
cases. The plan is constitutional. It is based upon the exclusive right
of the Governr/ient to create money and the explicit duty "to regulate
the value thereof." It does not proi)()se to take away from the rich
that which they have acquired by law, but to enable the unemploved
millions to be employed and to create the wealth needed for feeduig,
clothing, and sheltering themselves out of the proceeds of their owfi
labor. The plan proposes to end the suffering of one-third of the
American peoj)le because of undeserved poverty. The plan is founded
upon benevolence, justice, and righteousness. It is based on reason,
on thoroughly well-established facts, and on sound precedents that
cannot be disputed by intelligent men of good will and honest purpose.
Chapter XXII
INTKUNATIONAIi STAHIMZATION IMPltACTFCA BLK
In 1934 the United States established a stabilization fund of
$2,000,000,000 in gold. This fund was placed within the discretion
of the Secretary of the Treasury as a means of stabilizing the American
dollar in relation to the pound sterling, the French franc, and other
foreign currencies.
NATIONAL ECONOMY AND THE BANKING SYSTEM gj
Groat Britain had a similar fund for the purpose of protecting the
pound from speculative changes. France had a similar fund.
The i(k>a was advocated in the United States that the stabilization
fund should be emplo^yod to stablize the pound sterling and French
franc and keep them in a constant relationship to each other. This
conception i)rocee(UMl upon the theory that a fixed relationship
between the ])ound, the franc, and the dollar woidd stabilize the
pound and the franc domestically, when, as a matter of fact, nobodv
but the French people rould stabilize the French frnnc, or the English
people tile ])oun(l.
Tlic French people could, of course, repeat what they did during
the World War; reduce the franc to one-fifth of its i)re-war purchasing
power. They expanded the franc in volume five times and diminished
its purcluising' power to one-fifth of what it luul been.
After the United States had changed the value of gold to $35 an
ounce, the franc went up above 6 cents but is now worth only 2.8
cents in terms of the dollar, less than half its dollar value previously.
The })ound sterling, however, under a managed currency for the 6
years since 1932 has had an index comparatively stable but rising
substantially" to correspond in some degree with the increase in
industrial i)ro(hiction.
Germany has stabilized its own currency and has had no change
in the domestic purchasing power of the mark during the last 2 years.
None but the British people can regulate the value of the pound
sterling, a.nd nobody but the people of the United States can regulate
the value of the dollar.
Notwithstanding the diminished amount of gold in the American
dollar (59 percent of its previous amount), the purchasing power of
the American dollar in its domestic markets has increased above the
standard for 1920.
Any country can destroy the value of its currency by violent
inflation and can double the purchasing power of its currency by
contracting credit and currency to one-half of what it had been.
When the United States restores its dollar to the normal, pre-
dej)ression price level of 1926 and maintains its purchasing power at
tliat point, and provides for its expansion to correspond with the
expansion of industrial production, it will have establi^shed a dollar of
uniform, debt-paying, purchasing power from one generation to
another. When this shall have been accomplished, an ounce of gold,
which is 35 times the stabilized dollar value, will havoa stable inter-
national exchange value and other nations may use such stabilized
ounce of gold by fixing the value of gold in terms of their own currency,
which they wish to maintain at a standard stabilized value.
France, for instance, could fix the franc at 2.8 cents, by declaring
an ounce of gold worth in francs the quotient of $35 divided by 2.8
cents.
Thus there would be established a temporary international stabilized
currency between France and the IPnited States.
But the continuance of the arbitrary price of $35 an ounce for gold
is subject to change by will of the Congress of the United States. It
might be changed if all other nations demonetized gold internationally.
It might be changed by modern processes of gold extraction and the
discovery of new and large deposits of gold which would cheapen
32 NATIONAL ECONOMY AND THE BANKING SYSTEM
gold and make it impossible for America to maintain its inteniational
value at $35 an ounce.
These considerations make it perfectly clear that there is no such
thing as a dependable international stabilization of gold at the present
stage of the world's history.
THK INADKQl'ACV OF THK FOUMKH GOLD STANDARD
For a long period of time the gold standard was rogardod as giving
to money stability in purchasing power, on the theory that gold in its
volume was not capable of rapid changes and the world could adjust
itself to the slight variations of the annual production of gold not
required in the commodity markets but employed for monetary pur-
poses.
For that theoretical reason, on March 14, 1000, the United States
established the gold standard, declaring the dollar of the United States
to consist of 25.85 grains troy weight of gold, nine tenths fine. The
law provided for unlimited coinage of gold on this basis. It was
supposed that this was a dependable safe standard; that it comprised
honest money; and that nothing else was really money except gold, or
promises to pay in dollars redcenuible in gold. This was the folklore
of the students and teachem of political economy, with a few very
important exceptions. It was the orthodox traditional belief that
gold and nothing else is money except gold, or paper money as a promise
to pay in gold dollars.
The orthodox students of monctnr}'^ science had not yet discovered
that this gold dollar was pegged to the American dollar used as
currency and as check money, and that the purchasing power of the
gold dollar went up and went down with the American dollar; and
that, therefore, the whole world currency which dependend on the
purchasing power of gold was really depending upon the purchasing,
debt-paying, power of the American dollar.
The orthodox traditional theory did not contemplate the rise and
fall of the purchasing power of the dollar due to contraction or exi)an'
sion, or due to the expansion or contraction of commodities.
In May 1913 the dollar index, representing the gold dollar, had an
index of purchasing power of 145. Under the expansion of credit due
to the World War, and the relative contraction of connnodities follow-
ing the war, the index of the purchasing power of the gold dollar fell to
60 in 1920. It rose to 167 in February 1933. vSince all of the notions
whose currencies are based on the gold standard were violently affected
by tliis change in the purchasing i)ower of gold^ they were all compelled
to go off the gold standard in their domestic circulation. This violent
increase in the purchasing power of gold simply meant that the curren-
cies based on gold suddenly had an increased purchasing power in
tenns of commodities (the products of labor) and property, resulting
in bankni})tcies in nuiny nations and interfering with the power of
nations to liquidate their bonded indebtedncvss, at home as well as
abroad.
This change in the purchasing power of gold was due directly to the
expansion of credit in 1920 and the contraction of credit in 1921 and
1933. It thus has been demonstrated to the whole world that gold,
as a monetary unit, had no stability whatever but slavisldy followed
the American dollar, and when the IJnited States arbitrarily fixed the
NATIONAL ECONOMY AND THE BANKING SYSTEM g3
price of gold at $35 an ounco, the world followed and accepted inter-
nationally the price fixed upon gold.
All countries are now off the domestic gold standard.
THE MODERN USE OF GOLD AND ITS POSSIBILITIES
In the vast exchange of commodities from nation to nation through
exports and imports, it should be taken as a fixed principle that in the
long nm the exports and services of a nation, which establish credits
abroad, are ])aid for by imports and services from such nations, the
credits so established being usually employed in the purchase of goods
and services from the im})orting nation. If such be not fully em-
ployed in the purchases of commodities and services then the trade
balances must be liquidated either by the shipment of securities or the
shipment of gold. Gold has been abandoned as a circulating medium
of exchange in the domestic business of nations, although it is still
actively employed as a means of liquidating trade balances. For this
purpose gold continues to be useful.
The United States has now accumulated oyer $14,000,000,000 of
gold in the liquidation of trade balances, financial balances, and trans-
fers of capital.
There is another very important use to which gold may be put, as a
means of promoting the stability of money in other nations of the
world.
Wlien the American dollar shall have become stable, it would stabi-
lize the purchasing power in the United States of an ounce of gold,
which by statute is worth 35 times $1.
V/licn an ounce of gold has a stable purchasing power in the United
States, other nations throughout the world, by regidating the volume
of currency in their domestic circulation in relation to the volume of
their industrial production, could employ the ounce of gold for the
purpose of stabilizing their domestic currency internationally.
It should be remembered that the American people do not use the
money of any other country in their domestic circulation. The only
use they have for such mono}' is to pay in those countries for amounts
due, for goods imported, for investments, or for the payment of
traveling exjKjnses.
There will always be, of necessity, daily fluctuations in the value
of the currency of the various countries in tenns of American money,
because of the fluctuating daily needs for such foreign currency for
the purposes cited. This would be true even if all nations attempted
to stabilize the purchasing power of their domestic currency.
Nevertheless, the United States would greatly serve the welfare of
international commerce if it stabilized the American dollar first by
regulating the volume and value of money in relation to the American
industrial production. In that event, the gold ounce would havfi
stability of i)urchasing power in the United States, and other nations
who had in similar maruier stabilized their domestic currency could,
by the use of gold, have a comparatively stable international exchaugv*)
without the violent fluctuations wliich have taken place in the world'
heretofore.
It should be obvious that the American people alone can stabilize
the purchasing power of their own money. It should be obvious
that the French people alone can stabilize the purchasing power of
their own money.
34 NATIONAL ECONOMY AND THH BANKING SYSTEM
If another World War should take place, the world would neces-
sarily see again the governments 'engaged expanding their currency
because of the exigencies of war, and therefore subjecting their cur-
rency to violent changes through such expansion.
Such a contingency makes it the niore manifest that the United
States cannot, through a gold stabilization fmid, or by any other
means, regulate the value of any foreign currency.
FOUEIGN KXCHANGE
The value of the American dollar in its relation to the British pound
sterling or the French franc depends upon the rclativo supply and
demand of the American dollar in Ix)ndon and Paris. In normal times
the demand for dollars in London or in Paris depends upon trade
balances and the shifting from one country to another of capital or
money.
The trade balances between the United States and Great Britain
depend upon the vohnne of i^ritish purchases in the United States
and American purchases in Great Britain. When these i)urchases are
balanced, there is comparative stability unless money or capital is
transferred from one country to another. The factors which enter
into this trade balance are imports and exports of conunodities, and
also the services rendered by citizens of one country to citizens of
another country. Great Britain receives large credits from marine
insurance and from marine freight on commodities transported
throughout the world in British ships. Iii addition there arc largo
expenditures by United States citizens in Great Britain which are in
excess of the expenditures of liritish citizens traveling in America.
These factors affect the trade balances.
When such trade balances are in favor of the United States an
equilibiium is brought about by the shipment of gold to the United
States as international money.
But in addition to these factors there exists a very large amount
of liquid money or liquid capital which for s))eculative purposes
may be transferred from Europe to the United States, as during the
inflationary boom preceding the stock-market collapse of 1929 when
it was found that approximately $3,000,000,000 of foreign money was
loaned in the secunty exchanges of the United States. In addition,
during the boom tliero was still larger investments in American
securities on the rising market, which were sold out in substantial
part immediately before the collapse of October 1929.
It was because of this huge volume of liquid money, controlled by
inteniational bankers, that Great Britain and France were compelled
to establish stabilization funds in order to offset and neutralize the
daily instability produced by speculative transfer of this international
funcl from one country to another. It was this international liquid
fund of money, which could be transferred from one country to
another, that caused the United States to estabhsli the $2,000,000,000
stabilization fund, so that the si)eculations could be offset by the power
of stabiHzation funds established in the United States, Great Biitain,
and France.
When, however, France stabilizes its own money in a domestic
sense by regulating the flow of money in relation to the production
of commodities and services in France?, and when Great Britain
stabihzes its currency by the public control of credit or money through
NATIONAL EOONOMY AND THE BANKING SYSTEM 35
re>gulating tlie flow of money in relation to the production in Great
Britain, and when the United States regulates, through congressional
action, the money suj^ply in relation to the national production and
stabilizes the purchasing power of the dollar, it maj^ then become
possible to establish the possibility of a fixed relationship between the
dollar, the pound sterling, and tne franc.
But the continuance of such stability between these three currencies
will at last depend upon the domestic action of the three Governments.
The first step toward the possibility of international stabilization is
the stabilization of the dollar, the pound sterhng, and the franc
domestically, and the continuance of such domestic stabilization in
the three countries. Domestic stabilization will diminish the op-
portunities of s])eculation by the liquid capital of international bankers
who have in the past speculated by transferring money from one
country to another, rendering money more abundant in the one and
less abundant in the other, through which j)rocess profit can be made.
This international speculation can be and should be abated by law
as a practice harmful to all nations who are the victims of such
process.
The regulation of the value of money in Great Britain has been
accomplished by the consent and cooperation of the clearinsj-house
banks that control the flow of credit in conjunction with the Bank of
England. The Bank of England receives its direction from the
Chancellor of the Exchequer, as for example:
Tliose for whom T speak wekpiiie the freedom which we have in comparison
with those in many other market?, but we wi«h to ii'^e that freedom in the only
l)roper way it can be used, and that is in harmony with the Government's policy.
I assure the Minister.s that if they will make known through the appropriate
channels what they wish us to do in tiie furtherance of their policies, they will
at all times find us willing with good will and loyalty to do whnt they direct aa
though we were under legal compuL^ion. (Governor of Bank of England, October
1936.)
We must look very largely to the Chancellor of the P'xchcquer, and we assure
him that in all matters his rerpiests govern the conduct of our affairs. We would
prefer, however, that he made his requests as such rather than in the form of
legislation. Legislation is too foreign a method. (Governor of the Bank of
Kngland a year later.)
And Germany and Italy also.
In present-day Germany banks are unobtrusively given instruction from high
above and they know better than to question the advisability of a policy thus
recommended to them. In Italy also banks are told by the Government what
their policy is to be and they implicitly obey orders. (Dr. Otto Hosenberg in an
address before the Society for Stability in Money and Banking, Inc., in Minne-
apolis, Minn., October 13, 1938.)
Chapter XXIII
STORM SIGNALS
The destruction of the property values of millions of small-business
men and millions of citizens throughout the country because of the
contraction of the money supply has given rise to demands for the
expansion of consumers' buying power through pensions of $200 a
month to persons of 00 years or more under the so-called Townsend
plan. Hundreds of thousands of people have actively espoused this
pension plan.
35 NATIONAL ECONOMY AND THE BANKING SYSTEM
It was the contraction of the money supply and the suffering of
one-third of the people for lack of food, clothing, and shelter that
caused the strenuous campaign urged by Senator Long, of Louisiana,
It Was the contraction of the money 8upi)ly of the people and the
suffering caused that led to the initiative petition in California, signed
by over 800,000 citizens, demanding a pension of $30 every Thursday
for every unemployed person over 50 years of age. This latter plan
proposed the issuance of scrip money by the State in disregard of the
principle of the exclusive issuance of the money by the Congress of
the United States. r~ . . .
These are storm signals indicating serious public discontent with
the contraction of the money supply and its consequences. Attention
has been called to the demand of the representatives of the American
Federation of Labor, the National Farmers Union, the National
Grange, the American Federation of Farm Bureaus, and the Coopera-
tive Council (representing thousands of farm organizations and
1,200,000 dues-p<iying members) for a correction of the evil and the
restoration of the purchasing power of the dollar to a normal pre-
depression level and the maintenance thereof.
Attention is called to the various bills, heretofore referred to, now
in Congress demanding by the congressional regulation of the value
of money a correction of the evils complained of.
It will be remembered that during the dejDression of 1929-32 the
people manufactured millions of dollars of scrip money for their own
convenience and safety because of the negligence of the Government
in providing the country with an adequate supply of credit and
currency.
Attention is called again to the party platforms promising relief,
and yet there is still a strong campaign going on in the United States
opposing Government control of the regulation of money on the
ground that the Congress of the United States cannot be trusted in
such matters.
There is need, and great need, of an informed public opinion based
upon reahties, facts, reason, and sound principles wliich have been
demonstrated by experience.
Other storm signals that are manifesting themselves in the United
States are organizations favoring communism, nazi-i?.m, facism, etc.
All of these organizations spring from the unmerited suffering of people
through undeserved poverty. When undeserved poverty is ended
by intelligent governmental action, there will be no reason, or excuse,
for those who advocate extreme or , un-American measures.
The intelligent democracies of the world and, particularly the
most intelligent democracy in the world, are now charged with the
responsibility of ending poverty in the world. When poverty is
abolished, as it can be under the principles of modern monetary
science, the entire human race will have an example set, through the
cooperation of the people, that they can create and distribute for
their own use all of the comforts, conveniences, and luxuries they
desire.
America is charged with the duty of protecting the greatest and
oldest democracy m the world from the subversive influences which
have arisen from a destructive monetary system in this country and
throughout the world.
NATIONAL ECONOMY AND THE BANKING SYSTEM g7
PUBLIC OPINION AND CONGRESSIONAL CONTROL
For many years the people of the United States have been actively
seeking a solution for the establishment of a dollar that shall have a
stable purchasing power.
The panic of 1907 was followed by the Vreeland-Aldrich bill (passed
in 1908) authorizing asset money based on sound bank assets. This
act established the National Monetary Commission which studied
the questions involved for 4 years, brought in a report of 32 volumes
describing the banking systems of other commercial nations, and
submitting a library on the subject matter of 2,500 volumes.
The National Monetary Commission proposed a bill establishing a
central bank governed by the member banks.
In 1913 the administration of President Woodrow Wilson brought
in the Federal Reserve Act, approved December 23, 1913, establish-
ing 12 Federal Reserve banks, concentrating the reserves of the
member banks, and establishing a system supervised by the Federal
Reserve Board, which represented the United States Government.
The Federal Reserve System financed the World War, raising
$40,000,000,000, and reduced bank failures to zero in 1918.
This act gave great powers to the Federal Reserve Board and the
Federal Reserve banks. The power was used in 1921 to contract
credit, resulting' in the depression of 1921. This contraction was
corrected under the Coolidge Administration and a great expansion,
in stocks and credit took place in the securities exchanges. This
resulted in a stock market boom and crash in October 1929. This
caused a niost serious depression.
In 1932 the Banking and Currency Committee of the House of
Representatives held hearings on bills to stabilize money, and passed
a short bill, called the Goldsborough bill, which provided for the
declaration of a national monetary policy to restore and maintain
the purchasing power of money, as ascertained by the Depart-
ment of Labor for the average of the years 1921 to 1929, inclusive.
This bill directed the Secretary of the Treasury, the Federal Reserve
Board, and the Federal Reserve banks to make effective this policy.
There appeared before the committee a number of men infonned
in modern monetary science who supported tliis bill. Representatives
of all the great agricultural organizations appeared in support of this
policy; the Natioiial Grange, National Farmers Educational and Co-
operative Union, the American Federation of Farm Bureaus, and the
National Cooperative Council (representing 4,000 farm organizations
and 1,200,000 dues-paying members). The representatives of the'
American Federation of Labor also approved this policy. Mr. Henry
A. Wallace, now Secretary of Agriculture, appeared and approved this
policy.
The committee reported the bill favorably. The House, after 2
days' debate, passed it by 289 to 60, 117 Republicans voting for it,
along with 172 Democrats and Farm-Laborites.
This bill failed to pass the Senate, the Senate substituting a measure
to expand the national-bank currency.
The national platforms of the Democratic Party, Republican Party,
Farm-Labor Party, and of the Progressive Party have heretofore been
cited with their approval of sound money under constitutional public
control.
gg NATIONAL ECONOMY AND THE BANKING SYSTEM
There is the strongest reason to believe that a substantial majority
of the Members of the House of the Seventy "fifth Congress were in
favor of congriBssional control and regulation of the volume and value
of money. The matter is being debated on the hustings throughout
the United States. A large number of speeches were made on tlie
floor of tlie House urging this reform. Study clubs throughout the
country are giving attention to this matter.
So there is need for an informed public opinion upon this question.
Twelve hundred thousand young men and young women arrive at
age annually whose future is clouded by the existence of 10 or 12
million unemployed people, arising from a failure of the Congress to
discharge its constitutional duty to create and regulate the value of
money.
The facts and principles set forth in the i)receding pages are intended
to aid the young men and women of America to understand this ques-
tion and to guid^ future public opinion. The responsibility is upon
them in part to perform this patriotic service. The time has come t^
end the underserved poverty of one-third of the American people. The
time has come to raise the national i^roduction to a maximum sufficient
to give all of the people of thC) United States an abundance of food,
clothing, shelter, leisure, and education, and permanent comfortable
family homes.
To this task this book summons the youth of the country for their
own sake, and for the sake*of the future of America.
APPENDIX
Glossary
Booms. — Where property prices rise above normal by the uide-
fensible expansion of credit and currency.
Creditor. — One who holds the bonds or obligations of another pay-
able in dollars; a bondholder; a holder of bills receivable; a bank
depositor; whether a government, corporation, or individual.
Debits. — Are charges against a demand deposit and represent the
volume of dollars emplo^yed by the people of the country through
checks drawn and paid m the transaction of the national business.
The volume of such checks debited in the standard year 1926 was
$845,000,000,000.
Debtor. — One who owes a bond or bills payable, or obligation of debt
to a creditor in whatever form, secured by mortgages, collaterals, or
unsecured; whether goveriiment, corporation, or mdividual.
Deflation. — The defensible contraction of the inflated credit and
currency of a previous hiflation. The indefensible contraction of
credit and currency cannot be called deflation with propriety. Defla-
tion is defensible contraction, not indefensible contraction.
Depressions, — Where property prices fall below normal due to the
indefensible contraction of credit and currency.
Extrinsic, — It is the exchange value for a legal-tender currency note,
as, the paper and ink on which it is printed haying no intrinsic value.
Hoarded money. — Consists of demand deposits held as reserves, or
for future investment purposes and which are not employed as a
medium of exchange, but can be so employed at the option of the
owner. Hoarded demand deposits have the effect of contracting the
money supply available as a medium of exchange. Currency hoarded
likewise is a contraction of the money available as a medium of
exchange and can result in compelling the })eople to manufacture
their own money in the form of scrip money, as in 1932.
In drcnlation. — Demand bank dej)osits in circulation are those
actively employed in the daily transaction of bushiess. A demand
deposit under one account may, to a high percentage, be a demand
deposit representing reserves and money held for future investment
while only 10~percent of such <lemand deposits may be actively
employed in the (laily transaction of bushiess. The ledgers of a bank
do not differentiate between a demand deposit which is 90 percent in
storage and 10 percent active. Therefore the amount of money in
circuhition must be ascertained by the volume of checks debited
against the demand deposit and otherwise may be ascertained by the
volume of money required to buy the commodities listed by the
Department of Labor in ascertainhig the price level.
89
90 NATIONAL ECONOMY AND THE BANKING SYSTEM
IndefensiMe coniraeiion, — Where the contraction of credit and cur-
rency deprives the people of a sufficient quantity of money to exchange
the maximum products and services of the people.
Indefemible expansion, — The expansion of credit and currency above
the quantity required for the convenient exchange of the products and
services of the people.
Index numbers. — These are employed for purposes of comparing one
year, month, or week with another. Usually the index is put at 100
so that the mind can quickly grasp an increase or decrease from the
normal standard by percentages; such as the index of the price level,
the purchasing power of money, the indexes of car loadings, factory
production, factory pay rolls, factory wages, etc.
Inflation . — An indefensible expansion of credit and currency. An
expansion of credit and currency beyond the requirements for the
exchange of the maximum products and services of the people. It does
not mean defensible expansion where the money supply is subnormal,
or below the afnount required for the maximum exchange of products
and services by the people.
Intrinsic. — It means a value in the commodity itself, as the gold in
a gold coin, or silver in a silver coin. A $10 gold piece has a certain
amount of intrinsic value besides the monetary value which at one
time was granted by law. A legal tender $10 bill has no intrinsic
value but an extrinsic value of $10.
Legislative mandate. — A declaration by the legislative power of a
policy or instruction.
Maximum employment. — The employment of the greatest number of
persons able and willing to work employed in the activities of a
country.
Maximum production. — The highest volume of products of which a
country is capable through manpower and machinery^.
Money. — Anything by conventional use employed as a medium of
exchange and measure of value, whether currency, bank checks, or
bank deposits in circulation. Savings accounts comprise money in
storage but are not money employed as a medium of exchange.
Monetary policy. — The national policy governing the flow and value
of money and/or the means for accomplishing such objectives.
Orthodox economist. — One who believes in the tradition of the gold
standard as the only sound currency.
Paper money. — It is legal tender in the United States, issued by the
Government of the United States exclusively. It is receivable for all
debts, public and private, and superior to gold, which is not legal
tender m the United States. Its exchange value depends upon the
necessity for its use in the payment of taxes, fixed charges, and the
transaction of business.
Products and services. — This term is used to indicate the amount of
products and services of labor exchanged by the people with each other
annually.
Purchasing power. — "Purchasinjj power" means the ability of the
consumers to buy and pay for desired goods and services.
Scrip money. — An obligation to pay issued by a corporation or
individual and redeemable by the issuer. Scrip issued by cities
receivable for taxes. Scrip issued by stores redeemable in mer-
chandise, etc.
Sound currency. — Legal-tender currency of uniform, permanent,
debt-paying power.
NATI014AL BCOI^OMY Am> THB BANKING SYSdMM ji|
StahUUy. — It means stability in tl^e value of projperty and mpi^^,
which measures the value of property. The stability of money is the
only basis upon which stabihty of property can be secured. j
turn-over, — The turn^over of money in circulation is the nun^ber
of times it turns over per anniun. The turn-over of demand deposits
employed in actual circulation is the number of times such deposits
are employed per annum by transfer from one to another, as in 1929
when the total volume of demand deposits was estimated to have
had a turn-over of 60 times per annum.
Lincoln's Monetary Policy
Money is the creature of law and the creation of the original issue of monejr
■houtd be maintained as an exclusive monopoly of National Government.
Money possesses no value to the State other than given to it by circulation.
Capital has its proper place and is entitled to every protection. The wages of
men should be recognized in the structure of and in the social order as more im-'
portant than the wages of money.
No duty is more imperative on the GovernmenHhan the duty it owes the pepplef
to furnish them with a sound and uniform currency, and of regulating the oiroular
tion of the medium of exchange so that labor will be protected from a vicious cur-
rency, and commerce will be facilitated by cheap and safe exchanges.
The available supply of gold and silver being wholly inadequate to permiii this
issuance of coins of intrinsic value or paper currency convertible into coin in the
volume required to serve the needs of the people, some other basis for the issiie of
currency must be developed, and some means other than that of convertibility
into coin must be developed to prevent undue fluctuations in the value of paper
currency or any other substitute for money of intrinsic value that may come into
use.
The monetary^ needs of in6reasing numbers of people advancing toward higher
standards of livmg can and should be met by the Government. Such needs can be
■erved bv the issue of national currency and credit through the operation of a
national banking system. The circulation of a medium of exchange issued and
backed by the Government can be properly regulated and redundancy of issue
avoided by withdrawing from circulation such amounts as may be necessary by
taxation, redeposit, and otherwise. Government has the power to regulate the
currency and credit of the Nation,
Government should stand behind its currenov and credit and the bank depK>site
of the Nation. No individual should suffer a loss of money through depreciated
or inflated currency or bank bankruptcy.
Government possessing the power to create and issue ourrencv and credit as
money and enjoying the right to withdraw both currency and credit from circula-
tion by taxation and otherwise, need not and should not borrow capital at interest
as the means of financing governmental work and public enterprise. The Govern-
ment should create, issue, and circulate all the currency and credit needed to satiih
fy the spending power of the Government and the buying power of consumers.
The privilege of creating and Issuing money is not only the supreme prerogative
of Government, but it is the Government's greatest creative opportunity.
By the adoption of these principles, the long-felt want for a uniform medium
will be satisfied. The taxpayers will be saved immense sums in interest, dis^
counts, and exchanges. The financing of all public enterprise, the maintenance'
of stable government and ordered progress, and the conduct of the Treasury wiU
become matters of practical administration. The people can and will be fur-
nished with a currency as safe as their own Government. Money will cease to be
master and «become the servant of humanity. Democracy will rise superior to
the money poWer.
(The above is an abstract of Lincoln's monetary policy from Mayor
McGeer's Conquest of Poverty and has been certified as correct by
the Legislative Reference Service of the Library of Congress at the
instance of Hon. Kent Keller, Member of the House of Representa-
tives.)
123338-^-39 7
Chabt No. 1.—
-MenHary duuri exhaSAHng cspaimon and wninuHon wUh retu&t, IdiS-Bi
WibRS admlnintration
Harding and Cooiidge administnOQai
1018
1014
1915
1916
1917
1918
1919
1920
1921
1933
i«e
oat
L Total baate»
35^903
4.3
i7."2'
20,765
4.4
15.3
5.5
18.1
---
37.062
4.5
15.7
5.8
18.8
i"6'
27,513
4.6
18.0
6.6
22.3
i'i"
27,923
4.9
30.5
7.8
25u8
iT
38,880
5l0
22.4
9.4
27.5
^4."2'
20,123
5.3^
24.7
1L8
32.4
6.0
30.8
ia8
37.0
30,812
6.4
20.0
ILO
34.5
i'e"
90,388
6.8
. 37.8
12.3
36.8
i"3'
aaiTS
6.8
30.4
18.8
30.8
"iri"
30^818
7,1
81.8
18.8
43.1
3. Totia capital > > ^
3. Totalloaasi > :!
4. TotalinTestmeTitst) _
5. Total ^posits i »
6. Total draoand bank deposits (exdudii^ inbb'c
toiids}i> _ _
7. Usitod States cmroicy in ciTculation » *
8. Cbocia cashed (per aninun) by all banks**
9. Commodity index (pric^leTel)
M- rtoUarfndM . .
IL Index, ^yrical products
12. Unempjoyment *.. „ . „
lA Tpdex c*i-Mw1ing^... ..
69.0
L449
38.9
67.4
L484
38.8
68.3
L464
4a6
22,"i56"
3.6
L8
ToTs'
30.5
0.7
82.9
L206
47.5
""i6,'9M'
5.5
2.4
k'2
42.2
0.8
122.0
0.820
56.2
isTsss"
6.2
3.0
isl'o"
45.5
LI
0.6
120.0
0.775
6S.6
6.1
3.0
i4a2'
49.9
3.7
L6
135.6
0-737
7a7
"ii'
63
6,451
7.9
3.9
imTo'
54.5
&2
166.5
0.601
78.7
L4
91
63
8.881
8.2
5.3
m'l'
66.3
6l7
3.3
93.4
L071
65.6
4.2
79
56
19,652
4.5
2.5
80."6"
6L4
5.6
2.1
96.3
L038
60.9
3.4
87
79
23,678
3.8
3.1
54.0
4.1
L2
loas
0.997
79.8
L5
100
81
18, n8
1 8.8
"96.T
82.7
4.0
L2
M.9
L«4
81.8
3.8
07
M
aa<i8
46
JL«
"948
80.4
40
Ql8
14. Ckffistractioa contracts
15. Namba-ofo(Hiimerrialfuliires
16. Exports*
17. Imports ». _
18. Total -ralae common stocks**
19. Index £um products..--.. .- .
20. Valoe oC farm lands »
3L Iteararyieedpts*^
22. Total rescTTe bank credit •
L8
60.T
38.4
a7
2.1
L8
■"^"7L6"
39.6
0.7
I The first 7 lines relate to June 30 only.
* !&idlcates billions and decimals thereof.
'This record b^ins in 1927. i
The above figures are from Federal Beeerre Board records.
* This record begins in 1929.
* Indicates mUlitms or decimals thereof.
* This record begins in 1925.
Chabt No. 2. — Monetary chart exhibiting expansion' and contraction vnth re«wtt«, 1925-SS
Coolidge administration
Hoover »]ministratlon
Boosevelt adminii^xatioB
1925
1926
1927
1
1928
1929
1930
1931
1932
1933
1834
1B88
urn
JUNK 30
L Total banks _
28,841
7.4
33.9
14.9
45.9
28,146
7.8
36.2
15.4
47.9
27.061
8.3
37.4
16.4
49.4
23.4
4.8
26,213
8-9
39.5
17.8
5L4
23.3
4.5
25,330
9.5
4L5
16.9
50.5
214
4.5
L230
95.2
L050
100.0
L8
106
117
21909
5-2
4.4
77.3
103.3
47.8
4.0
L4
24,079
10-0
40-6
17-5
SO- 5
212
4-2
900
86-8
L1S2
918
4.7
92
92
28,365
3-8
3-1
63-9
88-9
47-8
4.2
LO
21071
9.5
35.4
19.6
47.6
19.5
4.5
660
711
L387
7S.5
8.7
75
63
28,285
14
11
47.4
65.4
43.7
3-3
.9
19,163
8.1
27.8
18.2
38.5
14.9
5.4
450
63.9
L565
6L5
13.1
56
28
3L822
L6
L3
15.6
45.7
36-8
11
13
14,624
6.9
212
17.9
34.2
14.0
5.4
430
6&0
L538
67.2
13.7
68
25
20,307
L7
L4
36.3
53.3
X.3
12
13
16^894
7-4
2L43
2L3
36.9
15.8
5.4
470
74.8
L340
63.8
113
83
32
11185
11
L7
34.4
83.3
8L0
3.3
16
18,083
7.3
2013
24:1
4L3
1IL9
&«
530
79.8
L253
9L0
US
63
37
U,«T9
13
10
3&3
78.3
318
4.0
14
i5b«e
1 Total capital i
3. Total loaiTis *
aai
4. Total iavestments i
»-8
5. Total deposits ^
46.9
8. Total demand bank deposits (exdadisg public
foBds)
318
7. United States coxrency in circalation i
S. Checks cashed (per annuin) by all banks ^
4.5
4.6
&3
». Cammodity index (priceleve^
10- lioHw index . . , -.
IOS.0
.971
86.4
1.7
1(»
122
21,214
4.9
4.2
29.7
109.3
40.4
3-8
LI
100.4
.971
91.1
1.6
106
129
21,773
4.8
4.4
35.6
100-9
49-0
4.0
L2
94.'i
1.063
93.4
10
103
129
23,146
4.9
4.2
410
96-5
47.6
4.1
LI
96-7
L034
96-0
12
103
135
23,842
6.1
4.1
519
106.7
47.4
4.0
L6
80.8
l.S(l
11. Index, physicalproducts.
109.0
11 Unemployment'.. ._
13. Index carloadingg,,,
14. CoQstraetion coDDacts-.
15. Nunibn'4>fonniiivnrciatfai]nreR
ma
73
81
16. Exports^ „ „
17. Imports »
18. Total Talne of common stocks^
48.9
19. Index fann products „„_
an. Vaine fnrm IttiHis 1 ... ^.
W.2
2L Treasury leoeipts i
-.-_.-
i Indicates billions and decimals tlwreoL
« Indicates millions w dedmals thereof. The above figures are from Federal Beserve Board records.
s The imports Hot the atonth of September 1936 were 2l6,00(yX)0. The exports for the month of Septonber 1936 v»e 220,000,000. Below these lino, the iadesntewcei an to
the yeais invdved, eixoqE>t 1996. The diedcs ea^ed pw annnm mdade from laniury to December as to the indexes f^
Non.— Li July 1936 about 10,500,000 of pecaons oat of 51000,000 of employables woe still unemployed (estimated)* Ordlnatily, total bank deposits iadnde pobUe taaSM, hot
not in this chart. The above flcwes represent expansion and contraction of credit and cntrency—money.
94
KATIONAJC BCONOUT AND THE BAKKXNQ dtStBSM
TlididlloiHiig ^^ of Reseaii^h of the
Boahl of QoYd^tB j^f thie Fedti^ and shows the
Important relationship between the volume of money, as indicated
by bank debits in 14 1 centers; and the factors listed, particularly
factoiy employment; Since the figures are ^ven by months^ it will
be seen how closely employment and production follow the expansion
and contraction of money. The hank debits also indicate the amount
of demand deposits in actual circulation, because these checks are
debited onl^r against demand deposits in circulation, not upon demand
deposits wmch are hoarded and frozen.
The relationship of the money supply and the circulation of money
by checks has been dealt with m detail throughout the book, so that
it is not necessary to repeat the argument, although this table em-
phasizes and makes clear the validity of the argument that national
employment and production depend strictly upon the volume of
money in circulation.
Seleded aeries on buaineaa activity
[Date without seasonal adjustment unless otherwise specified]
Year and month
1920
1W7
1928
1929
1930
1981
1982
1983
1934
1938
193«
1987..
1920
January
February
March
April
May
June —
July
August
September....
October
November....
December
\ 1927
January
February
March
AprU
May
June
July
"August
September....
October
November....
December....
January.
February.
Marcb....
AprU
1928
It
k
Is
108
106
111
119
96
81
64
76
79
90
106
110
106
106
106
107
106
106
108
110
111
HI
110
107
107
108
110
108
109
107
106
106
104
102
101
102
107
100
108
108
101.7
99.6
99.7
106.0
92.4
78.1
66.3
73.4
86.7
91.3
97.8
106.8
102.7
102.4
102.0
101.7
101.1
101.3
101.0
101.6
102.0
102.0
101.4
lOl.O
100.4
100.8
100.4
100.2
100.1
100.1
99.7
90.6
99.1
98.4
97.9
97.4
97.8
97.8
97.9
97.7
100.0
96.4
96.7
96.3
86.4
73.0
64.8
66.9
74.9
80.0
80,8
86.3
103.2
102,0
100.6
100.3
100.6
100.4
99.6
99.1
99.7
99.4
98.4
97.9
96.6
96.8
94.7
94.1
H2
94.1
K8
96.2
96.3
96,6
96.3
96.4
90.4
95.8
96.6
90.6
Security prices
Capital issues
(millions of dollars)
S
106.0
108.2
106.4
102.0
105.7
103.6
98.6
102.6
103.6
106.1
107.0
104.4
lOSTl
106.0
106.0
104.3
104.7
104.7
104.6
104.2
104.3
104.6
105,4
106.2
106.9
107.3
108.9
109.1
109.7
109.2
106.8
107.3
107.6
107.7
108.6
109.3
109.1
108.9
109.3
108.8
I
11
S
97.6
100.7
100.8
98.0
99.3
90.9
69.6
73.4
84.6
88,6
97.6
93.4
96.0
96.6
96.3
97.4
98.1
98.2
97.7
97.6
97.7
97.6
98.6
99.0
99.7
,99.6
ioo.i
100.6
100.6
100.0
100.0
100.9
101.3
101.7
101.9
102.2
102.3
102.2
102.1
102.1
100.0
118.3
149.9
190.3
149.8
94.7
48.6
63.0
72.4
78.3
111.0
111.7
101,8
101,8
96.8
92,9
03,2
97.2
100.0
102.9
104.3
101.6
103.1
105.4
106.6
107.9
100.1
111.1
114.2
116.4
117.2
122.0
127.7
126.7
120.6
133.1
134.4
132.3
137.9
145.9
7,369
9,774
9,898
11,613
7,619
4,038
1,761
1,063
2,160
4,699
6,214
3,878
728
639
661
655
662
714
684
343
489
672
7,00
622
951
941
662
885
960
942
456
608
697
1.011
733
1,028
762
863
900
1,038
6,314
7,655
8,040
10,091
6,909
3,089
1,194
720
1,386
1,467
1,972
2,080
646
669
606
639
648
671
524
284
446
608
433
641
817
685
669
661
685
743
432
440
486
842
464
760
661
600
605
009
1.044
2,218
1,858
1,422
709
949
587
343
774
3,242
4,242
1,798
82
70
45
116
14
143
60
69
-43
64
267
81
134
256
109
234
276
199
24
168
111
169
269
278
201
253
365
130
Ǥ
A
g'SS
5l
607,966
673,861
806,405
086,027
601,956
481,357
322.366
»282,706
331,605
374, 171
428,606
433,042
64,145
44,915
56,404
61,837
48,020
60,662
60,959
47,011
46,954
52,535
47,384
67,070
64,714
48,220
68,518
65,683
64,143
66,820
63,682
63,702
66,760
69,201
57,085
65,441
62,885
64.493
70,634
67,003
$1,000
1.048
1.034
1.049
1.157
1.370
1.643
1.617
1.335
1.250
1.238
1.169
.969
.980
!997
.905
.996
1.005
1.009
1.003
1,006
1,010
1.021
1.036
1.044
1.056
1.003
1.002
1.063
1.060
1.050
1.038
1.035
1.038
1.037
1.037
L044
1.047
1.035
> Adjusted (or seasonal Tartation.
* March axoluded; complete data not ayaOable on aoeount of bank hoUdayi.
NATtONAIi ECONOMY ANB THB BAKKINO STSTBM (^
iS«{ee<<(I «er«0a on hutineu ocfMif— -Continued
Ye«r and montb
1028
May
Jiwe
July ...
August
September....
October.
November-..
December
1029
January
February
March
April
May -..
June
July
August *.
September.,-.
October
November... -
December....
1930
January
February
March
April
May
June
July
August
September
October
November....
December
1931
January
February
March
April
May
June
July
August
September....
October
November
December —
1932
January
February
March
April
May
June
July
August
September....
October
November
December
1033
January
February
March
April
May
June
July
August
September....
October
Novembw....
Deoember
108
108
109
110
113
116
117
118
119
lis
118
121
122
125
124
121
121
ii8
110
103
106
107
103
104
102
98
93
90
90
88
86
84
83
86
87
88
87
83
82
78
76
73
73
74
72
69
67
63
60
69
68
60
66
67
66
66
66
63
60
66
78
91
100
91
84
76
72
75
98.2
98.7
99.3
100.4
100.9
101.7
102.7
103.8
104.2
106.0
106.3
106.4
106.6
107.0
108.1
108.4
107.8
106.6
104.4
101.9
100.6
99.0
97.7
97.0
96.7
93.9
91.2
89.0
87.7
86.7
86.3
83.8
82.4
81.4
81.1
8i.O
80.7
79.2
78.7
77.6
76.0
73.9
72.6
72.4
71.8
71.4
69.9
67.6
66.3
63.6
61.9
62.4
64.4
65.8
66.2
65.6
64.9
66.0
62.2
63.8
67.1
72.2
77.4
81.0
82.8
S2.9
81,2
80.1
97. b
96.7
97.4
97.6
9S.6
96.7
96.8
96. 8
95.9
98.-4
96.1
95.6
94.7
96.2
96.6
96.3
96.1
96.1
93.6
93.3
92.6
91.4
90.2
90.0
88.8
86.8
84.4
84.3
84.4
83.0
81.3
79.6
78.2
76.8
76.0
74.8
73.2
72.1
72.0
72.1
71.2
70.3
70,2
68.6
67.3
66.3
66.0
65.6
64.4
63.9
64.5
65.2
66.3
64.4
63.9
62.6
61.0
69.8
60.2
60.4
62.7
65.0
68.9
69.6
70.8
71.2
71.1
70.8
Security prlo(^
108.2
107.4
105.7
103.6
103.8
103.7
104.8
103.9
103.0
101,8
100,2
101.6
101.5
100.9
101.6
100,8
101.0
102.0
106.0
104.8
104.
104.2
106.7
104.8
106.6
106.2
106.2
106.0
106.2
106.6
106.8
106.4
106.6
106,6
106.6
106.1
106.2
106.6
106.4
106.2
104.0
98.8
99.0
96.3
91. 3
98.6
96.9
98.8
97.7
97.6
99.7
101.8
101.6
101.5
101.4
102,3
103.6
102.6
101.1
101. S
102.7
108.7
108.9
108.7
108.8
108.6
100.6
99.0
101.6
100.3
99.8
90.4
99.9
100.0
100.4
99.7
99,7
99.2
98.6
98,7
98.3
97.6
97.5
97,1
96.6
97.8
97.4
98.6
98.7
96.7
09.7
99.7
iOO.O
99.9
100.2
100.8
101.6
99.8
08.1
04.8
07.8
97,8
07,2
06.2
04.8
94.2
96.4
02.0
88.4
82.0
82.4
73.1
78.1
74.9
75.0
67.0
62,2
60.6
62.1
72.4
74.6
70.8
60.2
67.7
70.7
68.5
66.0
64.8
72.4
77.7
81.5
80.7
77.5
78.8
73.1
Tie
162.1
146.3
144.3
14&3
166.6
160.1
171. 1
171.4
185.2
186. 6
180. 1
186.6
187,8
190.7
307,3
218.1
225.2
201.7
161.1
153.8
166.3
165.5
172.4
181.0
170.6
162.8
149.3
147.6
148,8
127.6
116.7
109.4
111.8
119.8
121,6
111.6
98.3
96.1
99.1
96.3
86.4
69.2
71.7
68,4
67.6
56.5
57,8
45.7
30.8
34.8
36.2
62.1
66.4
61.4
47.9
47.1
49.1
44.9
43.8
46.5
61,6
72.8
79.8
74,4
78.5
00.5
68.8
70.4
Caidtal
(mflUoniof
1»020
1,023
439
271
643
760
000
1,221
1,062
1,043
1,016
810
l,fi29
748
964
888
1,622
870
298
676
849
602
841
934
1,184
772
686
260
494
436
260
396
613
226
702
616
473
404
270
127
288
46
133
144
199
95
191
148
125
154
166
174
142
187
77
160
I
846
795
309
261
488
702
042
1,162
013
016
066
676
1,187
731
894
863
1,314
836
280
670
781
666
760
882
1,080
711
663
183
380
364
348
431
206
660
413
340
260
226
120
245
45
112
123
185
74
162
71
01
84
105
63
83
100
45
125
no
65
67
20
20
17
46
36
67
44
224
U«
167
122
86
40
05
04
50
86
80
87
76
57
174
338
40
30
55
67
87
50
140
128
60
185
803
17
60
35
808
84
18
07
86
73
62
05
61
82
86
114
71
12
12
'S
142
203
124
144
46
7
48
1
21
21
14
21
29
73
34
70
50
111
50
28
83
85
45
87
8
10
31
108
45
10
SI
\
to
71,010
73,485
68,061
68,170
73,804
71,349
83,386
83,814
70,777
88,534
74^780
70.635
00,660
77,081
77,844
77,017
05,537
83,000
00^763
60,438
53,636
66,738
62,040
61.81i
63,8i3
53,744
46,098
48,636
54,460
43,176
63,107
46,353
38,031
47,011
46,440
43,030
45.309
30,461
84,037
86,700
38,803
39,009
30,846
38,600
37,261
39,889
39,021
25.411
27,108
38,380
35,215
26.081
35,306
30,750
36^787
34.400
22,4t7
33,028
81, sn
86,451
H666
30,807
34,181
30^801
$1.QM
tOM
1.037
1.038
ItOU
1.084
1.044
1.0M
%^ NAilpNAt BX30N0MY AND TttB I^^
SdeeUd teriei Mi hurinetB <ieft*9<<^— ContitkU^
Y«ttftnd month
Febraary.
Marcb
1094
July
Atiirtut....
September.
October...
November.
December.,
1930
|ftnaary....«.
FebruHry
March
fifij";;:::::::
June
Jttly
August
Beptomber....
October
November....
Pecember
1930
January
February
March
^■r;:::::::
June
July
August
September....
October
November
December
1987
January
February
March
April
May
June
July
Augmt
September....
October......
November.,.,
December
January...
February..
March
Awil
May
June
July
August.....
September.
90
90
88
80
85
87
80
88
91
95
90
101
97
9i
93
101
101
104
108
108
109
110
114
121
114
110
118
118
118
114
114
117
111
102
88
84
80
79
79
77
70
77
83
to. 7
83.9
80.9
88.3
89.0
88.3
87.3
80.4
81.3
84.4
84.0
80.4
88.8
90.0
90.7
90.8
90.1
89.2
90.1
91.1
91.8
93.0
94.1
94.fi
94.3
92.8
93.0
94.3
96,7
90.7
98.4
99.3
99.9
100.8
102.8
104.9
I0S.2
100.0
107.3
108.4
109.1
108.4
109.3
106.0
107,2
105.1
100.0
95.1
90.0
88.9
87.4
80.4
83.7
82.4
82.9
80.1
72.2
73,0
73.7
73.3
73.7
74.0
74.8
70.4
77.0
70.6
70.6
70.9
78.8
79.6
79.4
80.1
80.2
79.8
79.4
80.6
80.7
80.6
80.0
80.9
80.0
80.0
79.8
79.7
78.0
79.2
80.6
81.0
81.0
81.6
82.4
84.2
86.9
80.3
87.8
88.0
87.4
87.2
87.9
87.6
87.4
80.4
83.3
81.7
80.9
79.8
79.7
78.7
78.1
78.3
78.8
78.1
78.3
Saeurlty ivtoea
100.2
102.1
103.1
103.7
104.7
104.9
105.0
104.3
102.3
103.4
108.7
104.1
106.4
100.4
100.2
100.8
100.8
107.0
107.3
100.6
104.7
104.9
106.3
106.2
106.8
100.3
100.8
107.0
107.1
100.9
100.0
107.2
107.2
100.9
108.2
107.9
107.3
107.2
106.2
102.0
103.3
103.6
104.0
104.0
103.3
10$. 6
104.0
104.7
106.3
100.4
106.0
104.8
100.1
100.0
106.7
106.9
104.8
78.0
84.0
84.8
87.0
80.1
80.3
80.1
83.9
83.0
84.1
84.3
85.8
87.0
87.4
84.6
85.6
87.0
88.3
89.2
89.9
90.4
89.8
91.1
02.4
06.3
97.2
90.0
96.9
06.6
90.2
97.1
97.7
98.6
99.6
90.8
99.9
100.3
100.0
98.6
90.0
90.2
95.0
96.3
94.8
91.3
80.4
83.3
82.7
80,0
79.3
70.0
73.8
70.6
76.3
80.8
81.3
78.7
74.0
80.9
77.2
79.0
71.8
73.1
71.4
67.6
07.4
07.6
08.3
09.0
70.1
08.0
04.0
07.6
73.1
76.6
78.8
83.0
85.0
85.2
93.3
95.3
100. 1
106.1
108.7
109.0
101.0
106.6
109.2
113.0
114.1
118.7
124.2
122.8
120.0
129.6
129.9
124.5
110.3
113.6
117.8
120.5
100.4
91.4
82.9
82.2
81.0
80.7
77.9
70.7
73.9
73.1
88.0
80.6
80.0
Oapttai lasuea
(millions of dollars)
91
89
149
242
144
308
370
209
71
157
137
187
141
90
290
608
474
612
040
425
438
368
384
422
402
303
763
986
420
734
340
297
409
404
372
725
0O3
627
884
303
205
600
341
188
221
204
137
105
122
199
245
302
217
511
400
415
48
81
99
141
100
119
214
180
30
122
104
139
92
60
106
90
83
55
127
194
173
148
118
221
123
107
128
176
112
218
104
217
178
180
168
206
244
190
187
169
149
SOO
248
79
154
90
96
123
93
82
120
197
157
347
390
180
43
-8
60
101
44
189
162
29
32
36
S3
48
49
46
186
418
391
467
013
231
266
220
266
201
279
196
636
810
308
616
236
80
231
278
214
469
309
337
197
144
110
200
93
109
07
108
42
42
29
117
119
160
00
104
76
230
27,221
20,010
29,680
31,281
28,707
30,142
27,702
20,706
23,894
26,627
24,662
30,811
29,980
25,609
31,649
31,660
30,108
31,475
33,287
30,268
29,031
32, 677
32,227
36,360
35,424
31,672
37,490
34,783
33,225
37,603
34,816
31,409
33,242
37,313
36,869
46,896
39,487
34,630
42,014
37, 144
34,410
30,404
30,914
31,890
33. 370
30,085
31,003
Z% 114
32,084
26,048
32,119
31, 169
28,841
32,797
30,605
28,270
29,020
$1,380
1,309
1.307
1,304
1,307
1,340
1,337
1,309
1.289
1,307
1,307
1,300
1,209
1,268
1,209
1,248
1,247
1,203
1,209
1,242
1,239
1,242
1,241
1,230
1,241
1,241
1,266
1,200
1,272
1,263
1,242
1,220
1,226
1,227
1,214
1,188
1.104
1.109
1.139
1.130
1.144
1.147
1.138
1.143
1.144
1.171
1.200
1.224
1.230
1.203
1.206
1.271
1.280
1.277
1.209
1.280
1.277
Sotlroee: Industrial production, Board of Oovernors of the Federal Reserve System; factory employmenti
Board of Oovemors of the Federal Reserve System; wholesale commodity prices, Bureau of Labor Statls<
Uos. Security prices; U. B. Qovemment bonds. Board of Oovernors of the Federal Reserve System; cor-
porate bonds, Standard Statistioi Co.; common stocks, Standard Statistics Oo.; capital issues, Commercia}
and Financial Chronicle and U. 8. Department of Commerce; hank debits, Board of Oovernors of the Fed*
•ral Reserve System; purchasing power of the dollar, Btuvau of I«bor Ststistics.
SOME IMPBOVBIf ENTA frkAT fiATXS BiBBN AOCOMFLtSHBD AND 90101 'WSf
ABB NEEDED IN OtTB MONBtART STBTBM
It will iutereat Btucients to know that the SeventT^third and
Seventy%ttrth Congresies since March 1933 have tak^i variottt
steps to improve the monetary structure, the more important of
which are as follows:
Made all money legal tender. .
Abolished the national-bank note.
Removed gold from domestic circulation.
Stopped the minting of gold and put it in bars in the vaults to bo
used exclusively as a commodity, or in the payment of international
balances upon permit of the Secretary of the Treasury.
Outlawed all future dollar contracts payable in gold by weight.
Made all existing dollar contracts payable by gold in weight subject
to payment by lawful money or legal tender.
Established a guaranty of bank deposits up to $5,000, etc.
Authorized the expansion of the currency through $1 silver certifi-
cates, and actually increased such currency by about a billion dollars.
Authorized gold to be sold for commodity uses and for payment of
foreign balances, and gold has been made salable at the price of $35
an ouuce for such uses by the Secretary of the Treasury.
Authorized the purchase of silver tmtil the silver held by the
United States shaU equal one-fourth of the gold so held.
Passed laws to regulate the security market and provided safe-
guards to prevent run-away speculation in securities by inflated
credit.
Removed the auxiliisiry corporations through which banks specu*
lated in securities.
Authorized the expansion of credit through the sale of Government
bonds to the banks in providing public works and public reUef to
people in distress.
Passed a new Banking Act of 1936, establishing the Federal Reserve
Board of Governors, of seven members, giving them control over the
expansion and contraction of credit and currency.
Given the Federal Reserve Board power to veto the election of the
president of any Federal Reserve bank.
Given the Federal Reserve Board absolute control of the interest
and discount rate of the Federal Reserve banks.
Given the Board the right to raise the reserves of member banks
100 percent.
Given the Board the power, through an open-market committee,
to require the Federal Reserve ban)^ to buy and sell bonds as a
means of expanding and contracting credit.
Expanded the power of member banks to lend money on real estate.;
Expanded the power of the Reserve banks to discount bankable
assets of member banks. _
Used the public credit on a colossal scale to relieve the most acute
effects of the existing depression.
Greatly improved the value of Government bonds and lowered the
rates of mterest on the public debt.
Its ]>olicies have resulted, by the sale of bonds to the banks, in
increasing the demand bank deposits, the money supply of the
country, until in volume they are steadily approaching normal;
gg WkXlOVIAL BOONQMT A1«D THB BAMKIMO SX8TBM
$llfiOQiQOOfiOO of d^jaAod deponto,, neverUielefls, are inak^ve a^
money Doing held as corporate reservea.
^ The question of monetary reform has been activdy under discus-
idon in the Seventh-fifth Congress without any final action being
takiniy but it is confidently expected ^by advocates of monetary reform
that the Seventy ndxth Congress will act in perfecting the national
monetary system.
The pending bills propose the Government taking over the stock
of the Federal Reserve banks, the declaration of a congressional
monetary poUcy; the expansion of the powers of the Boajrd of Gov-
ernors of the Federal Reserve System^ eliminating the open market
committee and the Federal Reserve Advisory Council,, establishing a
dollar of uniform, permanent, debt-paying, purchasing power oy
regulating the volume of money. There wffl be considered probably
the more equitable distribution of money by States, the establishment
of one form of currencv, the coordmation of agencies affectm^ mone-
tary control, sutjh as tne Federal Deposit Insurance Corporation, the
Comptroller of the Currency, the Secretary of the Treasury; and
making all banks members of the Federal Reserve System.
: Over a thousand pages of testimony was taken by the Banking and
Chirrency Committee of the House during 1938. (Advanced students
will find the congressional hearings of mterest.)
' The Committee on Banking and Currency of the United States
Senate proposed a careful examination of the public control and regula-
tion of the value of money before the meeting of the Seventy-sixth
Congress,
The subject matter will also be considered by the Temporary
National Elconomic Committee, as directed by Senate Joint Resolu-
tion No. 300.- ^
Modified bills by Congressmen T. Alan Goldsborough, Wright
Patman, and Charles G. Binderup are expected to be under con-
sideration in January 1939.
A FEW QUOTATIONS OP NOTABLE LEADERS
Benjamin Franklin, on being asked in Great Britain how he
accoimted for the prosperous condition of the Colonies, said:
That ifl simple. It is only because in the Colonies we issue our own money.
It is called colonial scrip, and we issue it in the proper proportion to the demand of
trade and industry.
It was not very long until this information was brought to the
Rothschilds' bank, and they saw that here was a nation that was ready
to be exploited ; here was a nation that had been setting up an exam-
ple that they could issue their own monejr in place of the money com-
mg through the banks. So the Rothschild Bank caused a bill to be
introduced in the English Parliament which provided that no colonv
of England could issue their own money. They had to use English
money. Consequently the Colonies were compelled to discard their
scrip and mortgage themselves to the Bank of England in order to get
money. For tne first time in the history of the United States our
money began to be based on debt.
Benjamm Franklin stated that in 1 year from that date the streets
of the Colonies were filled with the imemployed, because when Eng-
land exchanged with them, she gave the Colonies only half as many
NATIONAL BCONOMY AND WE BANI^ING STSTBM :!^
units of payment in borrowed money from Uie Rothschild Baoliiii
they had in scrip. In other words^ their circulating medium was
reduced 50 percent^ and everyone became unemployed. The podr^
houses became filled^ according to Benjamin Franklin's own statement.
Mr. Franklin went further than that. He said that ikas was the
original cause of the Hevolutionary War. In his own language:
The Colonies would gladly have borne the little tax on tea and other matters
had it not been that England took away from the Colonies their money, whioh
created unemployment and dissatisfaction.
(As narrated by Hon. C. G. Binderup in a speech on the floor of the
House of Representatives, 76th Cong.)
Permit me to issue and control the money of a nation, and I care not who makes
its laws * ♦ * (Mayer Anselm Rothschild, 1700).
John Adams wrote to Thomas Jefferson in 1787:
All the perplexities, confusion, and distress in America arise, not from defects
in the Constitution or confederation, not from want of honor or virtue, so much
as from downright ignorance of the nature of coin, credit, and circulation.
Thomas Jefferson said:
I believe that banking institutions are more dangerous to our liberties than
standing armies. Already they have raised up a monied aristocracy that has set
the Government at defiance. The issuing power should be taken from the banks
and restored to the people to whom it properly belongs.
Ricardo says:
That commodities rise or fall in proportion to the increase or diminution of
money I assume as a fact that is incontrovertible.
Andrew Jackson said:
If Congress has the right under the Constitution to issue paper money, it was
given them to be used by themselves, not to be delegated to individuals or to
corporations.
Adam Smith, called the father of political economy, said:
Money measures things and things measure money, Each measures the other
by and according to its own abundance, by comparison. If you double the volume
of money in circulation, you double the price of everything. By doubling the price
you divide the debt because it takes only half as much labor or the products of
labor to pay the same debt. If you divide the amount of money in circulation,
you divide the price of everything. By dividing the price of everything, you
double your debts, for it will take twice as much labor or the products of labor to
pay the same debt.
John Stuart Mill tells us:
That an increase of the quantity of money raises prices and a diminution lowers
them, is the most elementary proposition in the theory of currency, and without
it we should have no key to any of the others.
The few who can understimd the system (check money and credits) will either
be so interested in its profits, or so dependent on its favors, that there will be no
opposition from that class, while on the other hand, the great body of the people
mentally incapable of comprehending the tremendous advantage that capital
derives from the system, will bear its burdens without complaint, and perhaps
without even suspecting that the system is inimical to their interests. (From a
letter written by the Rothschild Bros, of London, England, to a New York firm
of bankers, June 26, 1863.)
From a letter written by the Rothschild Bros, of London, England,
to a New York firm of bankers, June 25, 1863:
The few who can understand the system (check money and credits) will either
be so interested in its profits, or so dependent on its favors, that there will b^
no opposition from that class, while on the other hand, the great body of th*
100 Niiii^ONAt BOONOMt AN0 THE) BANKINa SYSTEM
peo^ meiit^Uy inoftpal^ of cmnprehehdihg the ti^tnendoiis advantage that
^i^tal derives from the iystem, will bear its burdens without complaint, and
perhiHps without even suspecting that the system is inimical to their mterests.
Salmon P. Chase, Secretary of the Treasury, 1861-64, Chief
Justice, United States Supreme Court, 1864-73, said:
My agency in promoting the passage of the National Bank Act was the greatest
financial mistake of my life. It has built up a monopoly which afifects every
interest in the countrv. It should be repealed; but before that can be accom-
plished, the people will be arrayed on one side and the banks on the other, in a
contest such as we have never seen before in this country.
In 1872 Horace Greeley wrote his opinion of the National Banking
Act, in part as follows:
While boasting of our noble deeds, we are careful to conceal the ugly fact that
by our iniquitous money system we h>»,ve nationalized a system of oppression,
which, though more refined, is not leas cruel than the old system of chattel
slavery.
James G. Blaine, former candidate for the Presidency who, on fcluv
floor of the Hou^e on February 10, 1876, said:
♦ ♦ * the money question should be approached in no spirit of partisan-
bitterness * ♦ ♦, Firmly attached to one political party myself, firmly
believing that parties in free government are as healthful as they are inevitable,
I still think there are questions about which parties should agree never to dis-
agree, and of these are the essential nature and value of the circulating medium.
James A. Garfield stated:
Whoever controls the volume of money in any country is absolute master of
all industry and commerce.
Benjamin Harrison said:
If there is one measure better calculated than another to produce that state
of things when the rich are getting richer and the poor are daily getting poorer,
it is a metallic currency.
Woodrow Wilson, 1916, said:
A great industrial nation is controlled by its system of credit. Our system of
credit is concentrated. The growth of the Nation, therefore, and all our activities
are in the hands of a few men ♦ ♦ *, We have come to be one of the worst
ruled, one of the most completely controlled and dominated Governments in the
civilised world — no longer a Government by free opinion, no longer a Government
by conviction and the vote of the majority, but a Government by the opinion and
duress of small groups of dominant men.
President Wilson, in advocating the Federal Reserve Act, said:
We must have a currency, not rigid as now, but really elastic, responsive to
sound credit, the expanding and controlling credit of everyday transactions, the
normal ebb and flow of personal and corporate dealings. Our banking laws must
mobilize reserves; must not permit the contraction anywhere in a few hands of the
monetary resources of the country or their use for speculative purposes in such
volume as to hinder or impede or stand in the way of other legitimate more fruitful
uses. And the control of the system of banking and of issues which our new law
is to set up must be public, not private, must be vested in the government itself
so that banks may be instruments, not masters, of business and of the individual
enterprise and initiative.
The late Hon. Charles A. .Lindbergh, Sr., in his book "The Eco-
nomic Finch", page 96, writing of the panic of 1920, said: ~
Under the Federal ReserVe Act panics are scientifically created; the present
panic is the first scientifically created one, worked out as we figure a mathematical
problem.
Thomas Edison said:
The only dynamite that works in this country is the dynamite of a sound idea.
I think we are getting a sound idea on the money question. The people have an
NATIONAL ECONOMY AND THE BANKINO SYSTEM
iiifltinct which tells them that something is wrong and that the wrong MmelSdw
centers in money.
Don't allow them to confuse you with the cry of *'paper money." The danger ,<tf
?aper money is precisely the danger of gold — if you get too much it is no good.
'here is just one rule for money and that is to. have enough to carry, all the le^ti*
mate trade that is waiting to move. Top little and too much are both bad. Btit
enough to move trade, enough to prevent stagnation on the one hand, not enough
to permit speculation on the other hand, is the proper ratio.
If our Nation can issue a dollar bond it can issue a dollar bUl. The element
that makes the bond good makes the bill good also. The difference between the
bond and the bill is that the bond lets money brokers collect twice the amount of
the bond and an additional 20 percent interest, whereas the currency pays nobody
but those who contribute directly in some useful way.
' It is absurd to say that our country can issue $30,000,000 in bonds and not
$30,000,000 in currency, Both are promises to pay; but one promise fattens the
usurer and the other helps the people.
It is the people who constitute the basis of government credit. Why then can-
not the pcoi))e have the benefit of their own gilt-edge credit bv receiving noh*
intorost-bearing currency — instead of bankers receiving the benefit of the people's
credit in interest-bearing bonds? If the United States Government will adopt
this policy of increasing its national wealth without contributing to the interest^
collector — for the whole national debt is made up of interest charges — then you
will see an era of progress and prosperity in this country such as could never have
come otherwise.
Henry Ford said:
The function of money Is not to make money but to move goods. Money is
onlv one part of our transportation system. It moves goods from man to man.
A (foliar bill is like a postage stamp; it is no good unless it will move cominodities
between persons. If a postage stamp will not carry a letter, or money will not
move goods, it is just the same as an engine that will not run. Someone will have
to get out and fix it.
In May 1928, 100 prominent British leaders connected with the
productive industries sent to Prime Minister Baldwin the following
statement:
We believe that a more stable system of currency credit and a means of sta-.
bilizing the price level are prerequisite to the restoration of prosperity of the great
basis industries of this country. It would do far more than the expedients which
the Government has been compelled to adopt. (New York Times, May 27,
p. 20, column 3.)
Mr. F. W. Pe thick-Lawrence, in 1929-31 financial secretary to the
British Treasury, stated:
I am convinced * * * that unemployment as it exists today is not an
economic but a monetary phenomenon: a stabilized price level with neither
inflation nor deflation is the only workable solution.
Frank A. Vanderlip, former Assistant Secretary of the Treasury,
in February 1936, said:
We have already tried borrowing and spending our way to recovery. We have
made numberless hopeful and well-meant experiments, aimed to bring us but of
the depression. Thus far we have not emerged, nor will we — until the fatal de-
fects of our money system have been corrected. To those defects, more than to
any other cause, I attribute the depression.
What is it we want of our currency? We want money in which we will have
unshaken confidence; confidence that it will be stable in its value. We want a
dollar that will, in the language of the President) ''not change its purchasing and
debt-paying power during the succeeding generation."
And again:
Congress should fix a permanent standard of value, not a permanent gold
weight, for the dollar; so that the dollar shall always buy the same gross section
of commodities measured by the price index.
Then Congress should create an executive authority to carry out its intention.
It should provide a mechanism for the management of our currency.
102 NATIONAL mOOVOWt ANP THB BANKINO 3YSTBH
Cte Ckstobei* 22, 1933, President Roosevelt said to the people of the
tFmt^ States:
Wliffiiyire have restored the price level, we shall seek to establish and maintain
a dbilair which will not change its purchasing and debt-paying power during the
«uoee6dihg seneration* I have said that in mv message to the American dele-
gation last Jtily, and I say it now once more. (The Public Papers and Addresses
of Franklin D. Roosevelt, vol. 2, p. 426.)
Maniner Eccles, chairman of the Board of the Federal Reserve
System, said in Collier's on June 8, 1936:
The banks can create and destroy money. Bank credit is money. It is the
money we do most of our business with, not with- that currency which we usually
-think of as money.
Maj. L. L. B. Angas, "Slump Aliead in Bonds":
The modem banking system manufactures "money" out of nothing; and the
f>roce88 is perhaps the most astounding piece of "sleight of hand" that was ever
nvented. Banks in fact are able to create (and cancel) modern "deposit money."
They can in fact inflate and deflate, mint and unmint, the modem "ledger-entry"
currency.
Robert H. Hemphill, former credit manager of the Federal Reserve
Bank of Atlanta:
If all bank loans were paid, no one would have a bank deposit, and there would
tiot be a dollar of currency or coin in circulation. This is a staggering thought.
We are completely dependent on the commercial banks. Someone has to borrow
^very dollar we have in circulation, cash or credit. If the banks create ample
synthetic money, we are prosperous; if not, we starve. We are absolutely without
a permanent monetary system. When one gets a complete grasp upon the
picture, the tragic absurdity of our hopeless position is almost incredible — but
there it is. It (the banking problem) is the most important subject intelligent
persons can investigate and reflect upon. It is so important that our present
<3ivilization may collapse unless it is widely understood and the defects remedied
very soon.
Ralph M. Haw trey, assistant secretary of the British Treasury:
Banks lend by creating credit. They create the means of payment out of
nothing.
Irving Fisher, Professor Emeritus of Economics at Yale, says —
When a bank lends or invests, it extends o;redit, i. e., creates check-book money.
When it gets loans paid or sells investments, it contracts credit, i. e., destroys
•check-book money. In normal times such creation and destruction of money
roushry balance; But when they do not balance the Nation's money is inflated
or dfeflated and causes a boom or a depression. '
Sumner H. Slichter, Professor of Business Economics at Harvard,
says in his Modem Economic Society:
When banks grant credit by creating or adding to deposits subject to check * ♦ ♦
new dollars are created. It is true that the new dollars are not stamped out of
gold; they are credit dollars and they are created by the stroke of the pen rather
than by dies and the stamping macnlnes, but their purchasing power is not less
than that of the dollars coined at the Government mint. In other words, the
principal way in which dollars are created in modern economic society is by
borrowing, This means that the number of dollars in existence in any particular
time depends upon the willingness and ability of banks to lend. The volume of
purchasing power fluctuates with men's state of mind; the growth of pessimism
may sudaenly throw millions of men out of work, or the growth of confidence
may create thousands of jobs overnight.
Viscoimt D'Abemon, formerly a prominent banker and after the
war the British Ambassador to Germany, states:
It is too much the custom to act as though prices were bom and not made —
A8 though they were sent down by Providence independently of human action,
NATIONAL BCONOmr AKD THB BAJNKIKO ST8Ti»l K|§
and m if ib^y had to be ae«^Hed like Urn gentle rain from baaven. Sueh a vi»ir
is, in my iuagment, a profouiid miftake. The price level is detemUned in tto
main by hu;\4Ui action and by wise or unwise dedsioos. A stable priee le¥^ l»
an achievement of intelligenee and not an accident of nature.
Lord Yemoti, a prominent leader of the coal industry, atat«s;
1. Movements to change wages and hours of labor up or down are the main
cause of i^idustrial strife.
2. These movements are largely due to changes in the value of money, which
is expressed by the average level of prices.
3. Changes in the value of money further aggravate the trouble by opening
out a gap between wholesale prices and the cost of living.
4. For these reasons it is urgently nocessary that the value of money should
be stabilized in the interests of industrial peace.
Sir Reginald McKenna, chairman of the board, London City Mid-
land, largest in the world, said:
History has shown that, apart perhaps from wars and religious intolerance, no
single factor has been more productive of misery and misfortune than the high
degree of variability in the general price level. This may sound like an extrava"
gant statement, but so far from being of the nature of' a demogogic outburst it Is
clearly demonstrable from the course of events in various countries ever since
money became an important element in the life of civilized communities. A
stable price level is a thing to be desired, second only to international and do*
mestio peace.
And again in the Midland Bank Monthly after the sterling pound
had been taken off gold, he says in part:
In the past 4 years the progress of ideas has been rapid. This is evident to
any reader of speeches on monetary policy delivered 10 years ago and today by
members of the governments in oifice. The maintenance or restoration of any
particular gold value for sterling — or, if the expression be preferred, of any par-
ticular sterling price of gold — is no longer regarded by both Govemmeht and
central bank as the dominant o&jective of monetary policy. In fact, the gdld
value of sterling has dwindled by 40 percent — neither the Government nor the
bank does anything about it, and no one is in the slightest degree disturbed,
since the pound buys just as much goods and services as in 1931.
Every bank loan creates a deposit, and the repayment of that loan destroys
the deposit. Every bank purchase of securities creates a deposit, and the sale
of securities destroys the deposit. — (Reginald McKenna, chairman of the board,
London City Midland.) '
* * ♦ a State issued paper money of full face value, guaranteed by a fully
covered redemption fund composed of securities, issued automatically, retirea
automatically, self-regulating, never redundant, never deficient, neutral in its
effect on prices but rising equal to any strain upon it: guaranteed against debase-
ment by the State which isi^ues it, and incapable of debasement by the communitv
which purchases and uses it. — (Description of an ideal paper n(ioney by Dr. Wil-'
Ham A. Shaw in his well-known work entitled "The Theory and Principles of
Central Banking.")
Never was a people so readilv deceived nor so easily subdued as the British
public of the present period. All one has to do is to raise the cry "inflation,** and
straightway all classes turn aside from the only road leading to safety, plenty,
peace, and happiness. — (Arthur Kltson in The Bankers' Conspiracy,)
When it is remembered that kings and governments have, throughout the
ages, insisted with jealous care on their prerogative of issuing money and control-
ling currency within their jurisdiction, it is somewhat strange to find modern
states accepting as axiomatic, a limitation of their sovereignty in the sphere of
money, so lar-reaching in its effects on their own powers and on the daily lives of
their citizens, as is involved in their agreeing to conform In all circumstances to |
standard of value over which they nave no control. — (PUinned Money, by Sir
Basil Blackett.)
Money is a social instrument and morally belongs to the people.
Money is merely a title to wealth.
It is redeemed every time it is accepted by the public for goods and services and
needs no gold redemption. — (Arthur Kitson.)
104 NATIONAt ECONOMY AND THE BANKING StS^M
Tbe youth wbo eim •olye the money que«tion will dp more for the world than
aU the professional soldiery of history.— (Henry Ford, My PhUosophjr of Life.)
♦ t * the cheque alone is manufaetured by the bankers without any limit
or iieiBtriction by law. By this interesting development the manufacture of cur-
rency, which for centuries has been in the hands of Governments has passed^ in
regard to a very important part of it, into the hands of companies for the con-
venience of their customers and the profits of their shareholders. — (Hartley
Withers, Esq., Business of Finance.)
Banks create credit. It is a mistake to suppose that bank credit is created to
any important extent by the payment of money in the banks. — (Encyclopedia
Btitannica.)
Now, curious as it may seem at first glance, it is substantially correct to say the
banks have the power to create money. — (Francis Williams, Esq., (Daily Herald)
Democracy and France.)
People often talk of money going abroad or of foreign money coming here, but
as a fact when gold is not in use money is incapable of migration. The title to
the money may change ♦ * ♦ but the change of ownership does not remove
the money, which necessarily remains and can only be expended where it was
created. No exchanjge transaction, no purchase or sale of securities, no import of
foreign goods or export of ©ur own can take money out of the country or bring it
here. Bank loans and their repayment, bank purchases and sales are in substance
the sole cause of variation in the amount of our money.— (Rt. Hon. Reginald
MoKenna.)
The difference between actual production and possible production represents
the cost to the people of the United States of maintaining present financial
institutions.
It should, by now, be quite apparent that any restriction of production results
in an impoverishment of society — so long as the need for the restricted goods is
not universally satisfied. --
A flow of buying power must be released which will be capable of commanding
the flow of desired goods and services. The limit should be set only by our
resources, manpower, equipment, and technology.
If production were released, the present conflict between labor atid capital
would seem to be automatically resolved. In order to distribute the goods and
services listed in the Budget, workers would have to be paid the most possible in
contradistinction to present practice, which compels employers to pay in most
cases the least possible.
At present tne United States habitually exports more than it imports. We
have become a creditor nation. Such a condition compels either a reduction of
our exports, a repudiation by foreign countries of their debts, or both. And both
are occurring.
Keeping in mind that wealth is made up of real things in the physical world and
is not A mere bookkeeping transaction, it becomes apparent that the period from
1923 to 1929, instead of being a time of extravagance, represented in fact an orgy
of saving.
Tho«e who regret the older days with their half-solved problems often fail to
realize that there can be no going back ♦ ♦ *. Either man must adjust
himself to modem technology or he must prepare for chaos and destruction. —
(The Chart of Plenty, by Harold Loeb.)
Extracts From thb Address of the Rt. Hon. Reginald McKenna, Chairman
OF the Midland Bank, January 26, 1938, as Given in the London
Economist, January 29, 1938
My lords, ladies, and gentlemen: The year 1937 opened with a good prospect
of sustained business improvement. The industrial outlook was so promising,
indeed, that fears were expressed of a coming boom. There were signs of growing
speculations on the stock exchange and in raw materials: some commodities,
particularly metals, had made a disturbing jump. Speculation, however, was
speedily checked by a reduction in the quantity of money and a decline in prices
followed. The decline went so far as to cause some anxiety, and, although the
quantity of money was later restored, the closing months of the year that had
opened buoyantly were marked by a more subdued outlook.
NATIONAL EOO^fOMT AND TEOSBANiaNa^S JQg
DKPBKSSINQ ▲MSRICAN INFLXnCNCBS
Meanwhile depressing influences Kftd ]t>een at work in the United States. In
April, President lU^osevelt declared that son^ prices^ partioulariy of the nb^rrpui
metals, were too high. . At the sanie time the gold MikTe based laip«ly^^^^Q^
fied inferences from th^t statement, gave rise to fear^ of a r^ri^tive monetury
policy and precipitated a Keneral decline in siock-exchtmii^^
primary commodity prices. But what might have be^n no more than a temporairy
break developed in the United States into a real business recession. The CQn>
fidence of industrialists, already disturbed by the policy of the Government^
became seriously shaken, and capital construction was arrested. Happily, no
similar obstacle to business enterprise is present in Great Britian, and there is no
indication here that the drop in stock-exchange quotations and commodity
prices will lead to a comparable decline in general trade.
It is natural that a setback first in prices and then in trade should be taken to
confirm the fears of people who are dubious about both the theory and practice of a
managed currency. Management has meant cheap and abundant money, and in
their view long-continued cheap money must lead to overexpansion of industry
and trade, which has its inevitable reaction in a slump. The alleged benefits of
eheap money, they tell us, have been exaggerated, while the danger of inflation
is always present. Now they see that a fall in prices and a drop in employment
have taken place while money is still cheap, and they regard this as definite con-
demnation of a managed currency.
* * * 4 * #41
* ♦ * Much had to be learnt and is being learnt, but, however diflicult it
may be to put on one side the ideas to which long usage of the gold standard has
accustomed us, we find in practice that the system is working smoothly. In the
light of our present knowledge a managed currency can no longer be regarded as
a mere temporary makeshift while the gold standard is in abeyance.
41 « f * )(> * *
* * ♦ It will be remembered that the gold standard, having been suspended
on the outbreak of war, was brought into operation again in April 1926. It was
maintained for ovt^r 6 years until September 1931, when once again it was sus-
pended. For the first time we then^set about controlling our currency without
any active effort to restore the gold standard. We started a true experiment in
managementr and the experiment has now lasted for a period almost precisely as
long as the restored gold standard was in operation, that is for rather over 6
years from September 1931 to the present time. In answering the (|uestion, then,
how have we fared, we can compare our economic condition dunng two equal
Xieriods, one on gold and the other under management.
« * * m * * *
* * ♦ When the demands upon the Exchequer are m heavy as they are
today, both for national defence and social services, I cannot imagine any Chan-
cellor of the Exchequer closing his eyes to the immense economy in the service df
the debt that has been made as a result of monetary policy.
The relative degree of cheapness and abundance of money in the two periods
is indicated by a comparison of the Bank rate and the quantity of bank deposita.
From 1926 to 1931 the average Bank rate was approximately 49ie percent. On
the abandonment of the gold standard the rate was raised to 6 percent as a pre-
cautionary ^measure which was soon found to be unnecessary. It was lowered by
stages u'ntil at the end of June 1932 it stood at 2 percent, where it has remained
ever since. There were no less than 16 changes of Bank rate in the first period of
6 years, ali of them consequent upon the obligation imposed on the Banl( of Eng-
land-to protect its meagre gold stock. The subsequent stability at 2 percent has
lasted over 6^ years. No previous period of stability of so long duration can be
found in the last hundred years, a fact which suggests that the frequent descrii^
tion of present money rates as abnormal is hardly justified. It is difficult to draw
a line between the normal and the abnormal, but a rate which is now in its sixth
year and shows no likelihood of variation in the early future might perhaps put
in a claim to being no more abnormal than any othfjr. The effect of freedom from
the restrictions imposed by the gold standard is no less apparent in the quantity
of money than in thiB rate paid for its use. Bank deposits, which were about
£1,800,000,000 on the average for 1031, rose to near £2,300,000,000 in 1937.
l(^ NAl*lONAti iBCWNOMY AND THJE BANKlNCJ StSTBM
TBADS AND lftMPX.OTIfl)NT
The.ii^creaae in purchwimg j>ower i^pwh tty has been
iM benefieiftl to indudtry^hd trade as to the Treasury. If we resume our com-
parison and consider our conditioii at the beginning and end of each of the 6-vear
periods^ the (Conclusion is inescapable that, whateVer other; forces may have Seen
In opeifation, a managed currency is at least consistent with flourishing trade.
Let us look first at weekly wage rates, taking rates in 1924 as the jjasic figure of
100. In 1926 the corresponding figure was 102; by 1931 it had fallen below 97;
but by last year it had risen again above 103. Taking the same year as the basis,
profits, according to Sir Josiah Stamp's calculation, stood at 104 in 1925, dropped
to 77 in 1931, but rose again to 120 in 1936, the last year for which this index is
available. The figures of industrial production repeat the same story in another
form— a decline over the first 6 years and a rise in the second by perhaps 60
percent. Thus it is evident that, while business was on balance dropping away in
the earlier period, it was steadily improving In the later.
Wages and profits are a measure of the incomes of the mass of the population.
Production measures the degree in which our industrial capacity is being used;
It governs the total of employment and unemployment, the returns for which
make perhaps a more striking comparison than any others. Between 1926 and
1931 the total of our/ insured workers rose by 1,200,000, but the employed fell by
200,000 and the unemployed rose in consequence by 1,400,000. This was how
we stood at the end of the first 6-year period. In the second the insured workers
increased by a further 800.000, but the number of those employed grew by as
much as 2,100,000, thus reaucing the unemployed by well over a million. What
a contrast! a decline in employment of 200,0(K) in the first period; an increase
of 2,100,000 in the second. No figures could be more convincmg; no figures could
exemplify more clearly the change in our economic condition in the two periods.
We have still some way to go before we shall be utilizing our full productive
capacity, but the experience of the past 6 years indicates that in currency and
credit policy we have not been led astray in using the opportunities for intelligent
management which the departure from gold presented. I have not suggested,
and I would not for a moment do so, that the pronounced improvement in our
position as between the two periods is due solely to the change in the monetary
system. But I do suggest that there is nothing in our present condition to indi-
cate that the change has been other than for the better or that it is fraught with
unknown perils in the future.
Noted Mbmbbrs of the Stable Money Association
John E. Aldred, John E. Aldred & Co.
B. H. Beckhart, Columbia University.
Luther L. Blake, president. Standard Statistics Co., Inc.
Francis H. Brownell, vice president, American Smelting & Refining Co.
Stuart Chase; director, Labor Bureau, Inc.
Lawrence Chamberlain, trustee, American Institute of Banking.
John R. Commons, University of Wisconsin.
Lionel D. Edie, University of Chicago.
Jeremiah W. Jenks, president, Alexander Hamilton Institute.
Edwin W. Kemmerer, Princeton University.
Fred I. Kent, director, Bankers Trust Co., New York.
E, W. Kopf, Metropolitan Life Insurance Co.
W. I, King, New York University.
Harry W. Laidler, director. League for Industrial Democracy.
Arthur W. Loasby, president. Equitable Trust Co., New York.
Wesley Clair Mitchell, National Bureau of Economic Research.
John Moody, president, Moody's Investors Service.
Warren M. Persons, economist, Goldman Sachs Trading Corporation.
William Cooper Procter, president, Procter & Gamble Co.
John E. Robensky, vice chairman, Bank of America, New York.
Jules S. Bache, J. 8. Bache A Co.
Luther L. Blake, Standard Statistics Co.
Percy M. Chandler, Chandler & Co., Inc.
NATIONAL ECONOMY AND THE BANKING SYSTEM l|)ff
Pierre S. dulPont, du Pont de Nenidura A Co.
George Easliibaiui, Eii^tman Kodak Co.
Michael Friedbxh,' Altxttan Foutidatitin.
Simon Guggenheim, foniier United States Senator from
Clarence H7 Kelsey, banker.
Clarence H. Mackay, the Matokay CoT,^
Edward B. MacCrone, E. E. MacCrone & Co.
Samuel Mather, Pickands, Mather & Co. .
George Depont Pratt, treasurer, National Council Boy Scouts of Ameri<ia.
James H. Rand, Jr., Remington-Rand.
John J. Raskob.
Alvan )T. Bimonds, Simonds Saw & Steel Co.
Alfred P. Sloan, Greneral Motors.
Silas H. Strawn, Winston, Strawn & Shaw.
James Speyer, Speyer A; Co.
Simon W. Straus, president, Straus National Bank A Trust Co., New York.
John G. Winant, former governor, New Hampshire.
John Hays Hammond, mming engineer.
David Starr Jordan, educator, author, naturalist.
Thomas I. Parkingson, president^ American Association for Labor Legislation.
B. W. Kilgore, chairman, American GJottoh Growers Exchange.
Charles H. Judd, chairman, American Council on Education.
H. E. Erdman, president, American Farm Economic Assooiiitidn.
E. B. Wilson, president, American Statistical Association.
A. E. Whitney, president. Brotherhood of Railrdad Trainm^Oi
C. E. Huff, president, Farmers' Educational and Cooperative Union of America.
Edward J. Vplz, president, International Phbtb-Efagmvei's* Union;
E. D. Schumacher, president. Mortgage Bankers AMobiatioh of Anderioa.
Frank D. Rock, president, National Association of Credit Men.
Milton W. Harrison, president, National Association of Owners of Railroad and
Public Utility Securities. "~
John R. Commons, president. National Consumers' League.
Uel W. Lamkin, president. National Education Association pf the United States.
William C. Redfield, president, National Institute ot Social Sciences.
Walter F. McDowell, president, United States League of Local Building and
Loan Associations.
Will F. Morrlsh, president, California Bankers Association.
W. R. Armstrong, president, Colorado Bankers Association.
George F. Kane, president, Connecticut Bankers Association.
Robert V. Fleming, president, District of Columbia Bankers Association.
Gordon L. Groover j president, Georgia Banketa-Association.
T. J. Hetland, president, Idaho Bankeirs AsscHiiation.
F. C. Dorsey, president, Kentucky Bankers Association.
W. P. O'Nela, president, Louisiana Bankers Association.
Heyward E. Boyce, president, Maryland Bankers Association.
W. L. Dunham, president. Michigan Bankers Association.
A. A. Spe^r,.i>re8ident, Missouri Bankers A^ociation.
R. O. Kaufman, president, Montana Bankers. Association.
William J. Couse, president. New Jersey Bankers Association.
Michael H, Cahill, president, New York State Bankers Association.
Philip A. Benson, pr^ident, Savihgs Biink Association of the State of New York.
John F. Daly, prudent, Oregon Bahkerd Association.
C. J. Kirschner, president.. Pennsylvania Bankers Association.
F. F. Be&ttie, presideiit, pouth Carolihi Bankers Association.
W. A. Williams, president, Texas Bankers Association.
G. H. Boyce, president, Vermont Bankers Association^
E. S. Shields, president, Virginia Bankers Association.
W. T. Triplett, president, Washington Bankers Association.
O. Jay Fleming, president. West Virginia Bankers Association.
M. E. Baumberger, president, Wisconsin Bankers Association.
Willis H. Booth, president, Merchants' Association of New York.
123338—89-
log NATIONAL ECONOMY ANP THE BANKING SYSTEM
COUBT DECISIONS ON MONEY
The foUowing is a list of decisions relating to the powers of Congress
over the issuaibice and regulation of the money of the United States (see
Annotated Constitution of the U. S.):
QriwooU V. Hepburn, 63 Ky. 20 (1866).
Uffol Tender Caeea, 12 Wall. 467, 645 (1871).
United SUUeev, Marigold, 9 How. 860, 668 (1850).
Brieeoe v. Bank of Kentucky, 11 Pet. 267 (1837).
HoueUm v. Moore, 5 Wheat. 1, 49 (1820).
Sturge* v. Crownirtahield, 4 Wheat. 122, 193 (1819).
Nori» V. UniUd States, 294 U. S. 317, 328 (1935).
CivU Rights Cases, 109 U. S. 3, 18 (1883).
Baender v. BameU, 265 U. S. 224 (1921).
LingSu Fan v. UniUd States, 218 U. S. 302 (1910).
Norman v. BaUimore <k 0. R. Co., 29^ U. S. 240 (1935).
Perry v. United States, 294 U. S. 330 (1935).
McCuUoch V. Maryland, 4 Wheat. 316, 404 (1819).
JwUiardv. Greenman, 110 Ui S. 421, 438, 449 (1884).
Veazie Bank v. Fenno, 8 Wall. 633» 648 (1869).
Merchants Nat. Bank v. United i States, 101, U. S. 1 (1880).
Osbom V. Bank, 9 Wheat. 738 (1824).
Bank of United States v. Bank of Georgia, 10 Wheat. 333 (1825).
Ward V. Smith, 7 WaU. 447 (1869).
Farmers* & M,Nait, Bank v. Desiring, 91 \5. S. 29, 33 (1875).
Legal Tender Case, 110 U. S. 446 (1884).
DooUy V. SmUh,\Z Wall. 604 (1872).
Nimmh & W. Railroad Co, v. Johnson, 15 Wall. 195 (1873).
Mwrow V. Henneford, 182 Wash. 626 (1935).
Ogden v. Saunders, 12 Wheat. 213, 266 (1827).
TESTIMONY OF EGBERT L. OWEN BEFORE COMMITTEES OF THE HOUSE
AND SENATE '
Goldsborough bill, H. R. 10617, Seventy-second Congress, first
session.'
Gold Reserve Act of 1934, S. 2366, Seventy-third Congress, second
session.
Banking Act of 1935, H. R. 5367, Seventy-fourth Congress, first
session.
Goldsborough bill, H. R. 9216, Seventy-fourth Congress, second
session.
Hearings before the Committee on Agriculture and Forestry,
United States Senate, Seventy-fifth Congress, first session, on farm
commodity prices.
Thomad bdl, S. 1990, Seventy-fifth Congress, first session.
Patman bill, H. R. 7230, Seventy-fifth Congress, third session.
< Mr. OWM is ajjo tb« Author of Sound, Safe, Sane Money, publUlMd In March 1933; and Stabilized Dol<
lift— Fermaarot Prosperity, published in January 1037. Both are now out of print.
o
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